Review

An overview of this Review issue.

The authors define the liquidity effect as “the purported statistical relation between expansion of bank reserves or a monetary aggregate and short-run reductions in short-term interest rates.” They then explore the liquidity effect in general equilibrium, representative-agent models.

Commentary on "Theoretical Issues of Liquidity Effects" by Lee E. Ohanian and Alan C. Stockman.

The authors narrow the disagreement about the empirical relevance of the liquidity effect. They thoroughly review the empirical literature on the liquidity effect, differentiating between single-equation and systems-modeling approaches.

Commentary on "Resolving the Liquidity Effect" by Adrian R. Pagan and John C. Robertson.

The author surveys the credit channel for monetary policy. He makes clear that there are two possible credit channels for monetary policy, and that both require asymmetry in the access of “small” and “large” firms to credit. The bank credit channel operates directly on the ability of depository institutions to make loans through the effect of monetary policy actions (open market operations) on bank reserves.

Commentary on "Is There a 'Credit Channel' for Monetary Policy?" by R. Glenn Hubbard.

The author surveys the credit channel for monetary policy. He makes clear that there are two possible credit channels for monetary policy, and that both require asymmetry in the access of “small” and “large” firms to credit.

The author proposes that sluggish price adjustment is necessary for monetary policy to have real effects. His purpose is to provide microeconomic foundations for price setting and the gradual adjustment of prices to new information.

Commentary on "Information, Sticky Prices and Macroeconomic Foundations" by Allan H. Meltzer.

Allan H. Meltzer replies to Randall Wright's commentary. 

Ben Bernanke, Thomas Cooley, and Manfred Neumann each take a different approach to summarizing the profession’s understanding of the effects of monetary policy in this conference panel discussion, "What Do We Know About How Monetary Policy Affects the Economy?"