Inflation and Interest Rates with Endogenous Market Segmentation

42 Pages Posted: 7 Feb 2007

See all articles by Aubhik Khan

Aubhik Khan

Ohio State University (OSU)

Julia K. Thomas

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2007

Abstract

The authors examine a monetary economy where households incur fixed transactions costs when exchanging bonds and money and, as a result, carry money balances in excess of current spending to limit the frequency of such trades. As only a fraction of households choose to actively trade bonds and money at any given time, the market is endogenously segmented. Moreover, because households in this model economy have the ability to alter the timing of their trading activities, the extent of market segmentation varies over time in response to real and nominal shocks. The authors find that this added flexibility can substantially reinforce both sluggishness in aggregate price adjustment and the persistence of liquidity effects in real and nominal interest rates relative to that seen in models with exogenously segmented markets.

Keywords: Inflation, Interest rates

Suggested Citation

Khan, Aubhik and Thomas, Julia K., Inflation and Interest Rates with Endogenous Market Segmentation (January 2007). FRB of Philadelphia Working Paper No. 07-1, Available at SSRN: https://ssrn.com/abstract=960714 or http://dx.doi.org/10.2139/ssrn.960714

Aubhik Khan (Contact Author)

Ohio State University (OSU) ( email )

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Columbus, OH OH 43210
United States

Julia K. Thomas

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States
612-626-9675 (Phone)
612-624-0209 (Fax)

National Bureau of Economic Research (NBER)

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