In this article, we seek to accomplish three
objectives. First, we discuss the basic mechanisms
at work in these liquidity effect models.
Second, we investigate one way of generating
persistent (as opposed to purely transitory)
liquidity effects. We argue that once a simplified
version of the model in Christiano and
Eichenbaum (1992a) is modified to allow for
small costs of adjusting sectoral flows of funds,
positive money supply shocks generate long
lasting, significant liquidity effects as well as
persistent increases in aggregate economic
activity. Finally, we discuss some of the policy
implications of this class of models.