LIQUIDITY, BUSINESS CYCLES, AND MONETARY POLICY ......Liquidity, Business Cycles, and Monetary...

NBER WORKING PAPER SERIES

LIQUIDITY, BUSINESS CYCLES, AND MONETARY POLICY

Nobuhiro KiyotakiJohn Moore

Working Paper 17934http://www.nber.org/papers/w17934

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138March 2012

The first version of this paper was presented as a plenary address to 2001 Annual Meeting of the Societyfor Economic Dynamics, and then as a Clarendon Lecture at the University of Oxford (Kiyotaki andMoore, 2001). We are grateful for feedback from many conference and seminar participants. In particular,we would like to thank Olivier Blanchard, Markus Brunnermeier, V.V. Chari, Marco Del Negro, EdwardGreen, Bengt Holmstrom, Olivier Jeanne, Arvind Krishnamurthy, Narayana Kocherlakota, GuidoLorenzoni, Robert Lucas, Kiminori Matsuyama, Ellen McGrattan, Shouyong Shi, Jonathan Thomas,Robert Townsend, Neil Wallace, Randall Wright, and Ruilin Zhou for very helpful discussions andcriticisms. We would like to express our special gratitude to Wei Cui for his excellent research assistance.Kiyotaki gratefully acknowledges financial support from the US National Science Foundation. Mooregratefully acknowledges the support from the European Research Council Advanced Grant. The viewsexpressed herein are those of the authors and do not necessarily reflect the views of the National Bureauof Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.

© 2012 by Nobuhiro Kiyotaki and John Moore. All rights reserved. Short sections of text, not to exceedtwo paragraphs, may be quoted without explicit permission provided that full credit, including © notice,is given to the source.

Liquidity, Business Cycles, and Monetary PolicyNobuhiro Kiyotaki and John MooreNBER Working Paper No. 17934March 2012JEL No. E10,E44,E50

ABSTRACT

The paper presents a model of a monetary economy where there are differences in liquidity acrossassets. Money circulates because it is more liquid than other assets, not because it has any special function. There is a spectrum of returns on assets, reflecting their differences in liquidity. The model is used,first, to investigate how aggregate activity and asset prices fluctuate with shocks to productivity andliquidity; second, to examine what role government policy might have through open market operationsthat change the mix of assets held by the private sector. With its emphasis on liquidity rather than stickyprices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969).

Nobuhiro KiyotakiDepartment of EconomicsPrinceton UniversityFisher HallPrinceton, NJ 08544-1021and NBERkiyotaki@princeton.edu

John MooreWilliam Robertson BuildingEdinburghScotland, EH8 9JYU.K.j.h.moore@ed.ac.uk

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