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| Author: | Andres, J. Lopez-Salido, J.D. Valles, J. |
| Title: | Intertemporal substitution and the liquidity effect in a sticky price model |
| Journal: | European Economic Review
2002 : SEP, VOL. 46:8, p. 1399-1421 |
| Index terms: | Liquidity Prices Capital Costs Economic theory |
| Language: | eng |
| Abstract: | The liquidity effect, defined as a decrease in nominal interest rates in response to monetary expansion, is a major stylized fact of the business cycle. This paper first confirms that, with separable preferences, low degree of intertemporal substitution in consumption is a necessary condition for the existence of the liquidity effect. In contrast to this result, in a model with non-separable preferences and capital accumulation it takes an implausibly high elasticity of intertemporal substitution to produce liquidity effect. The robustness of these results is also analysed. The paper concludes that price stickiness, by itself, does not guarantee the existence of a liquidity effect. |
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