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Keywords:

  • Liquidity effect;
  • non-Ricardian economies
  • E43–E52

Abstract

It has often been found difficult to generate a liquidity effect (i.e., a negative effect of monetary injections on the nominal interest rate) in the traditional “Ricardian” stochastic dynamic model with a single infinitely lived household. We show that moving to a non-Ricardian environment where new agents enter the economy in each period allows such a liquidity effect to be generated.