Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy
58 Pages Posted: 10 Jun 2017
Date Written: April 2018
This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.
Keywords: segmented asset markets, monetary policy, countercyclical markups, liquidity effect, heterogenous money holdings
JEL Classification: E310, E320, E510
Suggested Citation: Suggested Citation