Prices and Money After Interest Rate Shocks With Endogenous Market Segmentation

Abstract:     
I obtain a slow response of prices and money, and a decrease in the quantity of money after interest rate shocks. Market segmentation causes the slow response. Endogenous segmentation causes the decrease in the quantity of money. I study two shocks: a permanent and a temporary increase in the nominal interest rate. Market segmentation is endogenous because agents decide when to trade bonds for money. I compare the transition with fixed and endogenous segmentation. The transition with endogenous segmentation reproduces the following two empirical facts: money decreases after shocks and the real quantity of money decreases with the interest rate.

Number of Pages in PDF File: 32

Keywords: price level, money demand, interest rate shocks, monetary policy, transfer costs, endogenous market segmentation

JEL Classification: E3, E4, E5

working papers series