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A Segmented Markets Model of Inflation

Author

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  • Browne, Frank

    (Central Bank and Financial Services Authority of Ireland)

  • Cronin, David

    (Central Bank and Financial Services Authority of Ireland)

Abstract

Models of inflation usually have monetary policy impacting the economy through either an interest rate or a monetary/credit quantity channel but not through both. We argue that policy is transmitted via two distinct types of agents – those that are and that are not liquidity constrained. The implication is that both channels must be seen as complementary, joint indicators of inflation and must both be incorporated in models of inflation. We provide a formal representation of price level determination and behaviour in this segmented markets framework and evaluate it econometrically using US data. Length: 32 pages

Suggested Citation

  • Browne, Frank & Cronin, David, 2006. "A Segmented Markets Model of Inflation," Research Technical Papers 17/RT/06, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:17/rt/06
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    References listed on IDEAS

    as
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    7. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
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