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Money and interest rates with endogeneously segmented markets

Author

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  • Fernando Alvarez
  • Andrew Atkeson
  • Patrick J. Kehoe

Abstract

This paper analyses the effects of open market operations on interest rates in a model in which agents must pay a fixed cost to exchange assets and cash. Asset markets are endogenously segmented in that some agents choose to pay the fixed cost and some do not. When the fixed cost is zero, the model reduces to the standard one in which persistent money injections increase nominal interest rates, flatten the yield curve, and lead to a downward-sloping yield curve on average. In contrast, if markets are sufficiently segmented, then persistent money injections decrease interest rates, steepen or even twist the yield curve, and lead to an upward-sloping yield curve on average.

Suggested Citation

  • Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 1999. "Money and interest rates with endogeneously segmented markets," Staff Report 260, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:260
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    Cited by:

    1. Filippo Occhino, 2001. "Monetary Policy Shocks in an Economy with Segmented Markets," Departmental Working Papers 200108, Rutgers University, Department of Economics.
    2. Marcus Hagedorn, 2007. "A Monetary Model with Strong Liquidity Effects," IEW - Working Papers 353, Institute for Empirical Research in Economics - University of Zurich.
    3. Matthias Doepke, 2005. "Show me the money : retained earnings and the real effects of monetary shocks," Recherches économiques de Louvain, De Boeck Université, vol. 71(1), pages 5-34.
    4. Chiu, Jonathan, 2014. "Endogenously Segmented Asset Market In An Inventory-Theoretic Model Of Money Demand," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 438-472, March.
    5. Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472, National Bureau of Economic Research, Inc.
    6. Yi Wen, 2009. "When does heterogeneity matter?," Working Papers 2009-024, Federal Reserve Bank of St. Louis.

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    More about this item

    Keywords

    Money; Interest rates;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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