Liquidity Effects
نویسنده
چکیده
Much of the conventional wisdom stems from Friedman’s (1968a; 1968b) informal discussions and Cagan’s (1972) reduced-form evidence on how nominal interest rates respond to a permanent change in money growth. According to that wisdom, the interest rate response is broken into a “short-run,” a “medium-run,” and a “long-run” response. In the short run, when wages, prices, and portfolios do not adjust much, a monetary expansion raises bond prices and lowers nominal interest rates. This can be thought of as “sliding down a money demand function.” If prices do not much adjust, then agents are willing to hold the higher real money balances only if the opportunity cost of doing so declines. The “liquidity effect” dominates in the short run. The medium run is characterized as a horizon over which incomes begin to rise, but prices continue to lag. Higher income raises the demand for money, shifting up the demand function, and raising the nominal interest rate. (Some authors refer to this as a rise in the demand for loanable funds.) The “income effect” dominates in the medium run. In the long run, all nominal prices have adjusted fully and the permanent increase in money growth raises expected (and actual) inflation proportionally with the rise in money growth. Over this horizon, real variables–except the real money balances– return to their initial levels, reflecting the superneutrality of money, and the expected inflation effect dominates. Some economists refer to the long run as a period over which the Fisher relation holds. Friedman (1968a) was bold enough to say that the liquidity effect last about six months; the nominal interest rate returns to its initial level after 18 months; it can take decades to the long-run impacts to dominate. Empirical work on liquidity effects, until recently, led to mixed results. As Leeper and Gordon (1992) document, in the absence of strong identifying assumptions, such as that the growth rate of the money supply is an exogenous process, there is no consistent evidence of liquidity effects in U.S. data. As that paper argues, either the liquidity effect truly is absent in the data or the reduced-form approaches have not successfully isolated exogenous movements in money growth. Identified VARs have had more success in producing the kinds of dynamic impacts that Friedman
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