Skip to main content
×
Home

BANKING, LIQUIDITY EFFECTS, AND MONETARY POLICY

  • Te-Tsun Chang (a1) and Yiting Li (a2)
Abstract

We study liquidity effects and monetary policy in a model with fully flexible prices and explicit roles for money and financial intermediation. Banks hold some fractions of deposits and money injections as liquidity buffers. The higher the fraction kept as reserves, the less liquid the money is. Unexpected money injections raise output and lower nominal interest rates if and only if the newly injected money is more liquid than the initial money stocks. If banks hold no liquidity buffers, liquidity effects are eliminated. In an extended model with temporary shocks, we show that failure to withdraw state-contingent money injections does not make the stabilization policy neutral, though the economy may undergo higher short-run fluctuations than otherwise. Under this circumstance, the success of stabilization policy relies on unexpected money injections being more liquid than the initial money stock.

Copyright
Corresponding author
Address correspondence to: Yiting Li, Department of Economics, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, 10617 Taipei, Taiwan; e-mail: yitingli@ntu.edu.tw.
References
Hide All
Basel Committee on Banking Supervision (2010) Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring. Available at http://www.bis.org/publ/bcbs188.pdf.
Bencivenga Valerie R. and Camera Gabriele (2011) Banking in a matching model of money and capital. Journal of Money, Credit and Banking 43, 449476.
Berentsen Aleksander, Camera Gabriele, and Waller Christopher (2005) The distribution of money balances and the non-neutrality of money. International Economic Review 46, 465480.
Berentsen Aleksander, Camera Gabriele, and Waller Christopher (2007) Money, credit and banking. Journal of Economic Theory 135, 171195.
Berentsen Aleksander and Waller Christopher (2011) Price level targeting and stabilization policy. Journal of Money, Credit and Banking 43, 559580.
Chiu Jonathan and Meh Cesaire A. (2011) Financial intermediation, liquidity, and inflation. Macro-economic Dynamics 15, 83118.
Christiano Lawrence (1991) Modelling the liquidity effect of a monetary shock. Federal Reserve Bank of Minneapolis Quarterly Review 15, 134.
Cochrane John H. (2014) Monetary policy with interest on reserves. Journal of Economic Dynamics and Control 49, 74108.
Diamond Douglas and Dybvig Philip (1983) Bank runs, deposit insurance and liquidity. Journal of Political Economy 91, 401–19.
Freedman Paul and Click Reid (2006) Banks that don't lend? Unlocking credit to spur growth in developing countries. Development Policy Review 24, 279302.
Fuerst Timothy (1992) Liquidity, loanable funds and real activity. Journal of Monetary Economics 29, 324.
Fuerst Timothy (1994) Monetary policy and financial intermediation. Journal of Money, Credit and Banking 26, 362376.
Grossman Sanford J. and Weiss Laurence (1983) A transactions-based model of the monetary transmission mechanism. American Economic Review 73, 871–80.
Kashyap Anil K., Rajan Raghuram, and Stein Jeremy C. (2002) Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance 57, 3373.
Lagos Ricardo (2011) Asset prices, liquidity, and monetary policy in an exchange economy. Journal of Money, Credit and Banking 43, 521552.
Lagos Ricardo and Wright Randall (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463–84.
Li Ying-Syuan and Li Yiting (2013) Liquidity and asset prices: A new monetarist approach. Journal of Monetary Economics 60, 426438.
Lucas Robert E. (1990) Liquidity and the interest rates. Journal of Economic Theory 50, 237264.
Ratnovski Lev (2009) Bank liquidity regulation and the lender of last resort. Journal of Financial Intermediation 18, 541558.
Rotemberg Julio J. (1984) A monetary equilibrium model with transactions costs. Journal of Political Economy 92, 4058.
Williamson Stephen (2004) Limited participation, private money, and credit in a spatial model of money. Economic Theory 24, 857876.
Williamson Stephen (2006) Search, limited participation, and monetary policy. International Economic Review 47, 107128.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords:

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 72 *
Loading metrics...

Abstract views

Total abstract views: 317 *
Loading metrics...

* Views captured on Cambridge Core between 23rd January 2017 - 22nd November 2017. This data will be updated every 24 hours.