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Modelling the Interaction of Liquidity to Price Dynamics

Author

Listed:
  • Bodo Herzog

    (ESB Business School)

Abstract

This paper studies the impact of financial liquidity on the macro-economy. We extend a classic macroeconomic model and compute numerical simulations. The model confirms that persistently low inflation can occur despite a high degree of financial liquidity due to a reallocation of cash, normal and risk-free bonds. In that regard, our model uncovers an explanation of a flat Phillips curve. Overall, our approach contributes to a rather disregarded matter in macroeconomic theory.

Suggested Citation

  • Bodo Herzog, 2020. "Modelling the Interaction of Liquidity to Price Dynamics," Economics Bulletin, AccessEcon, vol. 40(2), pages 1420-1430.
    • Handle: RePEc:ebl:ecbull:eb-20-00171
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Macroeconomic Theory; Liquidity; Flat Phillips Curve; Numerical Simulation; Modelling;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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