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Long-Run Money Growth and the Liquidity Effect

Author

Listed:
  • Cothren Richard

    (Virginia Tech)

  • Edwards Jeffrey A

    (Texas Tech University)

Abstract

Limited participation models explain a short-run liquidity effect as arising from the redistribution of income from non-participants in the bond market to participants in the bond market. However, these models also imply that the liquidity effect is smaller the larger is long-run money growth. Using cross-country data, we show that in the short run, the correlation between money growth and the nominal interest rate, and the regression coefficient of the latter regressed on the former are larger (algebraically), the larger is long-run money growth. These results are consistent with this latter implication of the limited participation models.

Suggested Citation

  • Cothren Richard & Edwards Jeffrey A, 2006. "Long-Run Money Growth and the Liquidity Effect," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-15, April.
    • Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:1:n:9
    DOI: 10.2202/1534-5998.1409
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    References listed on IDEAS

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    Keywords

    Fisher effect; liquidity effect;

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