"The Liquidity Effect in a Flexible-Price Monetary Model", Oxford Economic Papers, (SSCI)

This paper examines the impact of macroeconomic policy shocks in a flexible-price dynamic stochastic general equilibrium (DSGE) model with money. Rather than adopting a money supply rule, monetary policy is modelled as a central bank using a simple interest rate rule (Taylor rule). Without assuming price stickiness or frictions in financial markets, this model is found to account for liquidity effects, generate higher persistence in output and inflation, and capture the positive unconditional cross-correlations relating inflation and output. The policy implication from this study is that an extensive monetary policy is able to simulate real output via the liquidity effect.