Prices and Money After Interest Rate Shocks With Endogenous Market Segmentation

32 Pages Posted: 15 Feb 2006 Last revised: 8 Nov 2013

See all articles by Andre C. Silva

Andre C. Silva

Nova School of Business and Economics

Date Written: February 1, 2009

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.

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

JEL Classification: E3, E4, E5

Suggested Citation

Silva, Andre C., Prices and Money After Interest Rate Shocks With Endogenous Market Segmentation (February 1, 2009). Available at SSRN: https://ssrn.com/abstract=883688 or http://dx.doi.org/10.2139/ssrn.883688

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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