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Oxford Economic Papers Advance Access published online on May 15, 2007
Oxford Economic Papers, doi:10.1093/oep/gpm010
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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


  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.

Key Words: JEL classifications: E52 • E31


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