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A simple model of liquidity

Abstract : We introduce liquidity motives in an otherwise standard monetary model. The Central Bank's policy rule is adapted to target the interest rate on liquid bonds. These deviations are sufficient to relax the requirement for active monetary policy and warrant determi-nacy in both passive and active policy regimes. We compare this model of liquidity with workhorse models and find that it can substantially replicate usual dynamics. By means of stochastic simulations, we also study how monetary policy stance affect inflation dynamics and find evidence of increased persistence for passive monetary policy.
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https://halshs.archives-ouvertes.fr/halshs-02978552
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Submitted on : Monday, October 26, 2020 - 3:20:11 PM
Last modification on : Tuesday, January 19, 2021 - 11:09:09 AM
Long-term archiving on: : Wednesday, January 27, 2021 - 7:01:12 PM

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Emanuele Franceschi. A simple model of liquidity. 2020. ⟨halshs-02978552⟩

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