Money and Interest Rates with Endogeneously Segmented Markets
Posted: 17 Aug 2008
Date Written: April 1999
This paper analyses the effects of open market operations on interest rates in a model in which agents must pay a fixed cost to exchange assets and cash. Asset markets are endogenously segmented in that some agents choose to pay the fixed cost and some do not. When the fixed cost is zero, the model reduces to the standard one in which persistent money injections increase nominal interest rates, flatten the yield curve, and lead to a downward-sloping yield curve on average. In contrast, if markets are sufficiently segmented, then persistent money injections decrease interest rates, steepen or even twist the yield curve, and lead to an upward-sloping yield curve on average.
Keywords: Liquidity Effects, Yield Curve, Term Structure of Interest Rates
JEL Classification: E4, E43, E50
Suggested Citation: Suggested Citation