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American Economic Journal: Macroeconomics: Vol. 6 No. 2 (April 2014)

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Persistent Liquidity Effects and Long-Run Money Demand

Article Citation

Alvarez, Fernando, and Francesco Lippi. 2014. "Persistent Liquidity Effects and Long-Run Money Demand." American Economic Journal: Macroeconomics, 6(2): 71-107.

DOI: 10.1257/mac.6.2.71

Abstract

We present a monetary model with segmented asset markets that implies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. The model simultaneously explains the short-run "instability" of money demand estimates as-well-as the stability of long-run interest-elastic money demand.

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Online Appendix (493.31 KB) | Download Data Set (315.56 KB) | Author Disclosure Statement(s) (21.75 KB)

Authors

Alvarez, Fernando (U Chicago)
Lippi, Francesco (U Sassari and EIEF, Rome)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E31: Price Level; Inflation; Deflation
E41: Demand for Money
E43: Interest Rates: Determination, Term Structure, and Effects
E52: Monetary Policy
E62: Fiscal Policy

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American Economic Journal: Macroeconomics


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