The Liquidity Effect of Monetary Policy with Credit Restrictions and Investment Adjustment Cost
Date Issued
2014
Date
2014
Author(s)
Chiu, I-Chan
Abstract
This paper is based on the model of Christiano (1991), which examined the impact of the short term liquidity effect from monetary policy on the nominal interest rate and real variables in dynamic equilibrium model. The model in Christiano (1991) could generate the liquidity effect, explaining the influence of monetary policy on the real variables. However, the effect was not strong and long-lasting enough compared with empirical evidences. The model in this paper extends the model of Christiano (1991), and we add the credit restriction and the investment adjustment cost into our model, trying to enhance the liquidity effect of the model before.
The credit restriction means that when banks make a loan, they cannot lend the whole money out because of some exogenous reasons (eg. credit control by the central bank or the reserve requirement ratio policy, etc.). We incorporate the credit restriction and discuss if the liquidity effect can be made stronger in our model. Also, the credit restriction is related to real income fluctuations. Different income levels have different credit restrictions in our model.
The investment adjustment cost means that when firms make investments, there are additional costs incurred. These costs may come from transporting costs, assembling costs or maintaining costs. The demand of investment is lower in models with higher investment adjustment cost. This means that when liquidity is injected into the market, it is prone to flowing into wages and consumptions, potentially generating stronger liquidity effect.
After incorporating these two factors into our model, we have found that both factors have impacts on the liquidity effect, and the impact of the credit restriction is relatively stronger. In general, if banks make more loan at higher income level and vice versa, the liquidity effect is stronger. However, the impact is only on the size of the liquidity effect. It has no obvious impact on the persistence of the liquidity effect.
Subjects
流動性
貨幣
貨幣政策
調整成本
信貸限制
量化寬鬆
Type
thesis
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