Persistent liquidity effects and long run money demand
By: Fernando E. Alvarez, Francesco Lippi
Contributors: Lippi, Francesco, 1968-; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17566; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17566.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We present a monetary model in the presence of 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.  At the same time, the model has completely classical long-run predictions, featuring quantity theoretic and Fisherian properties.  The model simultaneously explains the short-run "instability" of money demand estimates as-well-as the stability of long-run interest-elastic money demand"--National Bureau of Economic Research web site.
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