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.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

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

Users who downloaded this paper also downloaded these:
Atkeson and Kehoe w14260 On the Need for a New Approach to Analyzing Monetary Policy
Ball w6597 Another Look at Long-Run Money Demand
Battaglini and Coate w17562 Fiscal Policy and Unemployment
Aizenman, Edwards, and Riera-Crichton w17692 Adjustment patterns to commodity terms of trade shocks: the role of exchange rate and international reserves policies
Ireland w14098 On the Welfare Cost of Inflation and the Recent Behavior of Money Demand
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us