Rising liquidity prices lead to lower wages and inflation pressures.
The article explores how money impacts economic fluctuations by studying a New Keynesian model with liquidity. It shows that when the interest rate on money is higher than on savings, the price of liquidity increases, leading people to consume and work less. This can lower real wages and put downward pressure on inflation. The study finds that the response to shocks can differ between models with and without liquidity, and highlights the role of liquidity in influencing business cycles.