Liquidity, Business Cycles, and Monetary Policy

This paper presents a model of monetary economy with differences in liquidity across assets. Our purpose is to study how aggregate production and asset prices ‡fluctuate with shocks to productivity and liquidity. In so doing, we examine what role government policy might have through open market operations that change the mix of assets held by the private sector. We also show that certain apparent

anomalies of asset markets are in fact normal features of a monetary economy in which the circulation of money is essential for a better allocation of resources.

For more information, contact Dirk Krueger.