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Oxford Economic Papers Advance Access originally published online on May 15, 2007
Oxford Economic Papers 2008 60(1):122-142; doi:10.1093/oep/gpm010
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Right arrow E13 - Neoclassical
Right arrow E23 - Production
Right arrow E31 - Price Level; Inflation; Deflation
Right arrow E43 - Determination of Interest Rates; Term Structure of Interest Rates
Right arrow E51 - Money Supply; Credit; Money Multipliers
Right arrow E52 - Monetary Policy (Targets, Instruments, and Effects)
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© Oxford University Press 2007 All rights reserved

The liquidity effect in a flexible-price monetary model

Shiu-Sheng Chen

Department of Economics, National Taiwan University, No. 21 Hsu-Chow Rd. Taipei, Taiwan; e-mail: sschen@ntu.edu.tw

JEL classifications:: E52, E31


  Abstract

This paper examines the impact of macroeconomic policy shocks in a flexible-price dynamic stochastic general equilibrium (DSGE) model with money. Rather than adopting a money supply rule, monetary policy is modelled as a central bank using a simple interest rate rule (Taylor rule). Without assuming price stickiness or frictions in financial markets, this model is found to account for liquidity effects, generate higher persistence in output and inflation, and capture the positive unconditional cross-correlations relating inflation and output.


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