Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-23T13:32:52.219Z Has data issue: false hasContentIssue false
  • English
  • Français

MARKET SEGMENTATION AND THE RESPONSE OF THE REAL INTEREST RATE TO MONETARY POLICY SHOCKS

Published online by Cambridge University Press:  01 November 2008

Filippo Occhino
Filippo Occhino*
Affiliation:
Rutgers University
*
Address correspondence to: Department of Economics, Rutgers University, 75 Hamilton Street, New Brunswick, NJ 08901, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Following a contractionary monetary policy shock, the aggregate output decreases over time for six to eight quarters, while the real interest rate increases immediately and remains high for three quarters, which can hardly be replicated by models characterized by a standard consumption Euler equation. This paper adopts a segmented markets framework where some households are permanently excluded from financial markets. The aggregate output and the nominal interest rate are modeled as exogenous autoregressive processes, while the real interest rate is determined endogenously. For intermediate levels of market segmentation, the model is able to account for both the persistent decreasing path of the aggregate output and the persistent increase in the real interest rate which follow an unanticipated increase in the nominal interest rate. The sign, the size and the persistence of the responses of the real interest rate and the money growth rate are close to those in the data.

Keywords

Limited ParticipationMarket SegmentationMonetary Policy ShocksReal Interest Rate
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 591 - 618
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alvarez, Fernando and Atkeson, Andrew (1996) Money and Interest Rates in Segmented Asset Markets. Manuscript, University of Chicago.Google Scholar
Alvarez, Fernando and Atkeson, Andrew (1997) Money and exchange rates in the Grossman-Weiss-Rotemberg model. Journal of Monetary Economics 40, 619–640.CrossRefGoogle Scholar
Alvarez, Fernando, Atkeson, Andrew, and Edmond, Chris (2003) On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand. NBER working paper 10016.CrossRefGoogle Scholar
Alvarez, Fernando, Atkeson, Andrew, and Kehoe, Patrick J. (2002) Money, interest rates and exchange rates with endogenously segmented markets. Journal of Political Economy 110, 73–112.CrossRefGoogle Scholar
Alvarez, Fernando, Lucas, Robert E. Jr., and Weber, Warren E. (2001) Interest rates and inflation. American Economic Review (Papers and Proceedings) 91, 219–225.CrossRefGoogle Scholar
Bernanke, Ben S. and Blinder, Alan S. (1992) The federal funds rate and the channels of monetary transmission. American Economic Review 82, 901–921.Google Scholar
Bernanke, Ben S. and Mihov, Ilian (1998) Measuring monetary policy. Quarterly Journal of Economics 113, 869–902.CrossRefGoogle Scholar
Chiu, Jonathan (2007) Endogenously Segmented Asset Market in an Inventory Theoretic Model of Money Demand. Bank of Canada working paper 2007–2046.Google Scholar
Christiano, Lawrence J. and Eichenbaum, Martin (1992) Liquidity effects and the monetary transmission mechanism. American Economic Review (Papers and Proceedings) 82, 346–353.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (1999) Monetary policy shocks: What have we learned and to what end? In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics 1A, pp. 65–148. Amsterdam: North-Holland.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Clarida, Richard H., Galí, Jordi, and Gertler, Mark (1999) The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature 37, 1661–1707.CrossRefGoogle Scholar
Fuerst, Timothy S. (1992) Liquidity, loanable funds and real activity. Journal of Monetary Economics 29, 3–24.CrossRefGoogle Scholar
Gordon, David B. and Leeper, Eric M. (1994) The dynamic impacts of monetary policy: An exercise in tentative identification. Journal of Political Economy 102, 1228–1247.CrossRefGoogle Scholar
Grossman, Sanford J. and Weiss, Laurence (1983) A transactions-based model of the monetary transmission mechanism. American Economic Review 73, 871–880.Google Scholar
Kennickell, Arthur B. and Starr-McCluer, Martha (1994) Changes in family finances from 1989 to 1992: Evidence from the Survey of Consumer Finances. Federal Reserve Bulletin 80, 861–882.Google Scholar
Khan, Aubhik and Thomas, Julia K. (2007) Inflation and Interest Rates with Endogenous Market Segmentation. Federal Reserve Bank of Philadelphia working paper 07–1.CrossRefGoogle Scholar
Lahiri, Amartya, Singh, Rajesh, and Végh, Carlos A. (2007) Segmented asset markets and optimal exchange rate regimes. Journal of International Economics 72, 1–21.CrossRefGoogle Scholar
Leeper, Eric M. (1991) Equilibria under “active” and “passive” monetary and fiscal policies. Journal of Monetary Economics 27, 129–147.CrossRefGoogle Scholar
Leeper, Eric M., Sims, Christopher A., and Zha, Tao (1996) What does monetary policy do? Brookings Papers on Economic Activity 2, 3–78.Google Scholar
Ljungqvist, Lars and Sargent, Thomas J. (2004) Recursive Macroeconomic Theory, 2nd ed.Cambridge, MA: MIT Press.Google Scholar
Lucas, Robert E. Jr. (1990) Liquidity and interest rates. Journal of Economic Theory 50, 237–264.CrossRefGoogle Scholar
Occhino, Filippo (2000) Heterogeneous Investment Behavior and the Persistence of the Liquidity Effect. Ph.D. Dissertation, University of Chicago.Google Scholar
Occhino, Filippo (2004) Modeling the response of money and interest rates to monetary policy shocks: A segmented markets approach. Review of Economic Dynamics 7, 181–197.CrossRefGoogle Scholar
Smets, Frank and Wouters, Raf (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 1123–1175.CrossRefGoogle Scholar
Strongin, Steven (1995) The identification of monetary policy disturbances: explaining the liquidity puzzle. Journal of Monetary Economics 35, 463–497.CrossRefGoogle Scholar
Uhlig, Harald (2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52, 381–419.CrossRefGoogle Scholar
Woodford, Michael (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar