Prices and Money After Interest Rate Shocks With Endogenous Market Segmentation
32 Pages Posted: 15 Feb 2006 Last revised: 8 Nov 2013
Date Written: 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.
Keywords: price level, money demand, interest rate shocks, monetary policy, transfer costs, endogenous market segmentation
JEL Classification: E3, E4, E5
Suggested Citation: Suggested Citation