This is easy to understand with nominal rigidities, and hard to understand from any real perspective. With nominal rigidities, price level does not instantly rise when nominal money rises, so the market clears along a different margin by reducing the nominal rate until people are again satisfied with their real balance holdings. This generates considerable confusion about the direction of monetary policy in inflationary AND deflationary environments. D. Empirical studies of the liquidity effect have been more problematic. Distinguishing cause, effect, and correlation is difficult, and your answer often depends on your procedure for solving the problem.
Policies are frequently endogenous responses to circumstances.
G. Formal econometric tests frequently fail to detect a liquidity effect unless they assume it. They find that if you control for past interest rates, money growth, prices, and output, then the impact of money on interest rates is positive . Econometric tests have more trouble coping with policy endogeneity than the narrative studies do. Again, probably due to endogeneity. The standard ISLM mechanism.