NBER WORKING PAPER SERIES
LIQUIDITY, BUSINESS CYCLES, AND MONETARY POLICY
Nobuhiro Kiyotaki John Moore
Working Paper 17934 http://www.nber.org/papers/w17934
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2012
The first version of this paper was presented as a plenary address to 2001 Annual Meeting of the Society for Economic Dynamics, and then as a Clarendon Lecture at the University of Oxford (Kiyotaki and Moore, 2001). We are grateful for feedback from many conference and seminar participants. In particular, we would like to thank Olivier Blanchard, Markus Brunnermeier, V.V. Chari, Marco Del Negro, Edward Green, Bengt Holmstrom, Olivier Jeanne, Arvind Krishnamurthy, Narayana Kocherlakota, Guido Lorenzoni, Robert Lucas, Kiminori Matsuyama, Ellen McGrattan, Shouyong Shi, Jonathan Thomas, Robert Townsend, Neil Wallace, Randall Wright, and Ruilin Zhou for very helpful discussions and criticisms. We would like to express our special gratitude to Wei Cui for his excellent research assistance. Kiyotaki gratefully acknowledges financial support from the US National Science Foundation. Moore gratefully acknowledges the support from the European Research Council Advanced Grant. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
© 2012 by Nobuhiro Kiyotaki and John Moore. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Liquidity, Business Cycles, and Monetary Policy Nobuhiro Kiyotaki and John Moore NBER Working Paper No. 17934 March 2012 JEL No. E10,E44,E50
ABSTRACT
The paper presents a model of a monetary economy where there are differences in liquidity across assets. Money circulates because it is more liquid than other assets, not because it has any special function. There is a spectrum of returns on assets, reflecting their differences in liquidity. The model is used, first, to investigate how aggregate activity and asset prices fluctuate with shocks to productivity and liquidity; second, to examine what role government policy might have through open market operations that change the mix of assets held by the private sector. With its emphasis on liquidity rather than sticky prices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969).
Nobuhiro Kiyotaki Department of Economics Princeton University Fisher Hall Princeton, NJ 08544-1021 and NBER [email protected]
John Moore William Robertson Building Edinburgh Scotland, EH8 9JY U.K. [email protected] &,*' - ,"'&
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