The Korean Economic Review
An Analytical Approach to the Liquidity Effects of Monetary Policy
Young Sik Kim (Seoul National University) and Manjong Lee (Korea University)Year 2010Vol. 26No. 2
This paper characterizes analytically the persistent liquidity effectsmoney injection in a model economy with goods market segmentation asas financial market segmentation. Households in financial sectors receivemoney transfers from the central bank and have access to the bond market,while others outside financial sectors do not receive money transfershave no access to the bond market. Also, a shock that causes householdsrelocate between financial sectors leads to more consumption expenditurefor both types of households. This goods market effect then causes ainjection to diffuse through the economy over time, generating persistentliquidity effects even when the money growth shock is transitory. Thisempirically important because persistent liquidity effects have been observedin many countries with a relatively low persistence of money growth.