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We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence
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. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure …-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the … magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable—even in the …
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