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The Liquidity-Augmented Model of Macroeconomic Aggregates

Athanasios Geromichalos () and Lucas Herrenbrueck
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Athanasios Geromichalos: University of California – Davis

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: We propose a new model of liquidity in the macroeconomy. It is simple and tractable, yet takes the foundations of liquidity seriously, and can thus be precise about the implementation, effects, and optimality of monetary policy. The model shines light on some open issues in macroeconomics: the effect of asset purchases, the tension between two channels through which the price of liquidity affects the economy (Friedman’s real balance effect vs Mundell’s and Tobin’s asset substitution effect), the liquidity trap, and the importance of using the right interest rate for empirical analysis.

Keywords: monetary theory; monetary policy; financial frictions; liquidity trap (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2017-10
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Handle: RePEc:sfu:sfudps:dp17-16