The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Liquidity Effects, Models of

  • Chris Edmond
  • Pierre-Olivier Weill
Reference work entry


An exogenous increase in the money supply is typically followed by a temporary fall in nominal interest rates. Flexible price macroeconomic models argue that this liquidity effect arises because asset markets are segmented. That is, only a fraction of the agents are present in the bond market when the central bank conducts an open market operation. However, to be quantitatively successful, segmented markets models assume frictions that are too large to be interpreted literally in terms of constraints faced by real-world firms and households. An important open question is: can a complicated array of microeconomic frictions imply one large aggregate friction of this kind?


Asset market frictions Asset market segmentation Cash-in-advance models Fisher effect Inflation Inflation expectations Liquidity effects Long-Horizon interest rates Monetary transmission mechanism Money supply Nominal interest rates Open-Market operations Real business cycle Real interest rates Short-Horizon liquidity effects Velocity of circulation 

JEL Classifications

D4 D10 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Chris Edmond
    • 1
  • Pierre-Olivier Weill
    • 1
  1. 1.