Liquidity, Interest Rates and Output

Shouyong Shi

Working Papers from University of Toronto, Department of Economics

Abstract: This paper integrates limited participation into monetary search theory to analyze the liquidity effects of open market operations. The centralized bonds market features limited participation and shocks to government bond sales, while the decentralized goods market features bilateral matches. Unmatured bonds can be used together with money to purchase goods in a fraction of matches, but in other matches a legal restriction forbids the use of bonds as the means of payments. In this economy, a shock to bond sales has two distinct liquidity effects. One is the immediate liquidity effect on the bond price and the nominal interest rate. The other is a liquidity effect in the goods market starting one period later, i.e., the effect on the amount of unmatured bonds circulating in the goods market. Thus, even independent shocks can affect the household s money allocation between the two markets, affect real output and the term structure of interest rates, and cause nominal interest rates to be serially correlated. I establish the existence of the equilibrium and, with numerical examples, examine equilibrium properties.

Keywords: Liquidity; Interest rates; Money; Search. (search for similar items in EconPapers)
Pages: 30 pages
Date: 2003-07-11
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Liquidity, Interest Rates and Output (2014)
Working Paper: Liquidity, Interest Rates and Output (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:shouyong-03-06

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