The general inability of sticky-price monetary business cycle models to generate liquidity effects has been noted in the recent literature by authors such as Christiano (1991), Christiano and Eichenbaum (1992a, 1995), King and Watson (1996), and Bernanke and Mihov (1998b). This paper develops a sticky-price monetary business cycle model that is capable of generating an empirically plausible liquidity effect. Time-to-build and time-to-plan in investment together with habit-persistence in consumption are the features of the model that allow it to produce this result.
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Last update: July 19, 2001