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Bodo Herzog
''Modelling the Interaction of Liquidity to Price Dynamics''
( 2020, Vol. 40 No.2 )
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.
Keywords: Macroeconomic Theory, Liquidity, Flat Phillips Curve, Numerical Simulation, Modelling
JEL: E4 - Money and Interest Rates: General
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Manuscript Received : Feb 29 2020 Manuscript Accepted : Jun 02 2020

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