Liquidity, Business Cycles, and Monetary Policy

59 Pages Posted: 31 Mar 2012

See all articles by Nobuhiro Kiyotaki

Nobuhiro Kiyotaki

Princeton University - Department of Economics

John Moore

University of Edinburgh - Economics; London School of Economics

Date Written: March 2012


The paper presents a model of a monetary economy where there are differences in liquidity across assets. 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 and liquidity; second, to examine what role government policy might have through open market operations that change the mix of assets held by the private sector. With its emphasis on liquidity rather than sticky prices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969).

Suggested Citation

Kiyotaki, Nobuhiro and Moore, John Hardman, Liquidity, Business Cycles, and Monetary Policy (March 2012). NBER Working Paper No. w17934, Available at SSRN:

Nobuhiro Kiyotaki (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

John Hardman Moore

University of Edinburgh - Economics ( email )

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Edinburgh, EH8 9JY, Scotland
United Kingdom

London School of Economics ( email )

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