The macroeconomic effects of money demand and capital liquidity: A financial accelerator perspective

Abstract

This paper establishes a dynamic stochastic general equilibrium (DSGE) model including secondary asset market and financial accelerator mechanism, to examine the short-term impact of money demand shock and capital liquidity shock through the financial accelerator mechanism on the macro-economy, and compares this impact under two monetary policies (Taylor rule and strict monetary growth rule). Under the two monetary policy rules, the impact of short-term equilibrium change on the level of households’ conditional welfare is also analyzed by using the change of conditional consumption compensation. Our findings reveal that (1) the two shocks affect the price changes of bonds and capital, which in turn affect Fisher rate and capital return changes, then the changes of risk premium, and ultimately macroeconomics via the financial accelerator effect, this is a new channel for the two shocks to affect the macro-economy; (2) The increase of total money demand caused by the increase of shoppers is stronger than that caused by the increase of expected tradability of capital; (3) From the perspective of conditional welfare level, under Taylor rule, households prefer the economy in the steady state of low equilibrium money demand, while it is the opposite under the strict money growth rule, and no matter which monetary policy rule, households more prefer the economy in the steady state of low equilibrium capital liquidity. Finally, the empirical analysis based on SV-TVP-VAR model further verifies the theoretical results of DSGE model.