NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Persistent Liquidity Effects and Long Run Money Demand

Fernando E. Alvarez, Francesco Lippi

NBER Working Paper No. 17566
Issued in November 2011
NBER Program(s):   AP   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w17566

Published: Fernando Alvarez & Francesco Lippi, 2014. "Persistent Liquidity Effects and Long-Run Money Demand," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 71-107, April. citation courtesy of

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