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Persistent Liquidity Effects and Long Run Money Demand

Author : Fernando E. Alvarez

Publisher :

Page : 0 pages

File Size : 22,76 MB

Release : 2011

Category : Economics

ISBN :

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Book Description

We present a monetary model in the presence of segmented asset markets that im- plies 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.









Liquidity Effects and the Monetary Transmission Mechanism

Author : Lawrence J. Christiano

Publisher :

Page : 12 pages

File Size : 45,82 MB

Release : 1992

Category : Equilibrium (Economics)

ISBN :

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Book Description

Several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment. Existing quantitative general equilibrium models, which allow for capital accumulation, are inconsistent with this view. There does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates, output, and employment to a money supply shock. However, a key shortcoming of these models is that they cannot rationalize persistent liquidity effects. This paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence. We argue that once a simplified version of the model in Christiano and Eichenbaum (1991) is modified to allow for extremely small costs of adjusting sectoral flow of funds, positive money shocks generate long-lasting, quantitatively significant liquidity effects, as well as persistent increases in aggregate economic activity.



Money and Capital in a Persistent Liquidity Trap

Author : Philippe Bacchetta

Publisher :

Page : 40 pages

File Size : 36,42 MB

Release : 2016

Category : Capital market

ISBN :

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Book Description

In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price flexibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem.



Hysteresis and Business Cycles

Author : Ms.Valerie Cerra

Publisher : International Monetary Fund

Page : 50 pages

File Size : 31,24 MB

Release : 2020-05-29

Category : Business & Economics

ISBN : 1513536990

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Book Description

Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.



Long-Run Demand for M1

Author : Scott Hendry

Publisher :

Page : 0 pages

File Size : 45,82 MB

Release : 1998

Category :

ISBN :

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Book Description

The goal of this paper is to investigate and estimate long- run relationships among M1, prices, output and interest rates, with a view to determining if there is a stable relationship that can be interpreted as long-run money demand. The paper uses a maximum-likelihood multiple-equation cointegration technique, developed by Johansen, to fit a system of equations to the data. One finding is that long-run, but not short-run, unitary price elasticity is easily accepted, while the income elasticity is close to one-half. The coefficients on the deviation of money from its long-run equilibrium in the vector error-correction model imply that when M1 is above its long-run demand, money will decrease and prices increase to restore long-run equilibrium. The effects of the deviation on output and interest rates are insignificant, pointing to the weak exogeneity of these variables. The implication of the results is that all the adjustment to return the economy to monetary equilibrium comes from fluctuations in money and prices. However, this does not preclude the possibility that changes in the stock of money may have short-run real effects. Indeed, the results suggest that changes in M1 lead short-term changes in output.



Monetary Policy Rules

Author : John B. Taylor

Publisher : University of Chicago Press

Page : 460 pages

File Size : 16,22 MB

Release : 2007-12-01

Category : Business & Economics

ISBN : 0226791262

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Book Description

This timely volume presents the latest thinking on the monetary policy rules and seeks to determine just what types of rules and policy guidelines function best. A unique cooperative research effort that allowed contributors to evaluate different policy rules using their own specific approaches, this collection presents their striking findings on the potential response of interest rates to an array of variables, including alterations in the rates of inflation, unemployment, and exchange. Monetary Policy Rules illustrates that simple policy rules are more robust and more efficient than complex rules with multiple variables. A state-of-the-art appraisal of the fundamental issues facing the Federal Reserve Board and other central banks, Monetary Policy Rules is essential reading for economic analysts and policymakers alike.



Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries

Author : International Monetary Fund

Publisher : International Monetary Fund

Page : 74 pages

File Size : 48,96 MB

Release : 2015-10-23

Category : Business & Economics

ISBN : 1498344062

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Book Description

Over the past two decades, many low- and lower-middle income countries (LLMICs) have improved control over fiscal policy, liberalized and deepened financial markets, and stabilized inflation at moderate levels. Monetary policy frameworks that have helped achieve these ends are being challenged by continued financial development and increased exposure to global capital markets. Many policymakers aspire to move beyond the basics of stability to implement monetary policy frameworks that better anchor inflation and promote macroeconomic stability and growth. Many of these LLMICs are thus considering and implementing improvements to their monetary policy frameworks. The recent successes of some LLMICs and the experiences of emerging and advanced economies, both early in their policy modernization process and following the global financial crisis, are valuable in identifying desirable features of such frameworks. This paper draws on those lessons to provide guidance on key elements of effective monetary policy frameworks for LLMICs.