Another reason for non-neutrality of financial liquidity

This paper reinterprets the non-neutrality of financial liquidity under a general equilibrium model with multiple financial liquidities, but without relying on price stickiness or market imperfection. Non-neutrality opens the possibility of effective monetary or financial policy on the crisis-prone real economy and thus revisiting its nature is worthwhile. We find that models, with only one asset and money, limit our ability to see the nature of financial liquidities interacting with real economy. It is an attempt at abstracting an economy with only one interest rate. It allows us to see the underlying reason for non-neutrality of financial liquidities, i.e., industry-specific rates of return distinguishable from the representative rate of return. Without the assumption of price stickiness but with a wider frame of multiple liquidities, this paper sheds light on what causes the non-neutrality of financial liquidity and naturally clarifies the meaning of money neutrality. We will draw the first order conditions and demand functions for money and liquidity without depending on market imperfection. It can easily extend to comparison of financial environments between developing and developed countries, and interpretation the meaning of quantitative easing as a way of resolving a crisis. We will incorporate the complicated reality of multiple financial liquidities in a theoretical model, which is the way to deepen our understanding of the nature of financial market, of discerning real versus the illusion, of exploring new ways of looking into real and financial phenomena. We do not always keep the truths in mind, however simple they are, often being too distracted to see the true nature of economic phenomena, including the seeds of financial crisis.