Prices and Money After Interest Rate Shocks With Endogenous Market Segmentation
Andre C. Silva
Universidade Nova de Lisboa
February 1, 2009
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, E5working papers series
Date posted: February 15, 2006 ; Last revised: February 24, 2009
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