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Monetary policy with sticky prices and segmented markets

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  • Tomoyuki Nakajima

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Abstract

We consider a sticky-price model with segmented asset markets, and examine its implications for monetary policy. Our finding is, first, that the response of the money supply growth rate to a money demand shock required to stabilize inflation is not affected by the existence of a liquidity effect, but the response of the nominal interest rate is. Second, when the monetary authority adopts a Taylor rule, whether or not it should be active to obtain local determinacy of equilibria depends on the existence of a liquidity effect. Our results suggest that the monetary authority should be careful about the existence and the degree of a liquidity effect particularly when the nominal interest rate is used as the policy instrument. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-004-0579-0
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 1 (01)
Pages: 163-177

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Handle: RePEc:spr:joecth:v:27:y:2006:i:1:p:163-177

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Monetary policy; Sticky prices; Segmented markets; Liquidity effect; Taylor rule.;

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Cited by:
  1. David M. Arseneau, 2004. "Expectation traps in a New Keynesian open economy model," Finance and Economics Discussion Series 2004-45, Board of Governors of the Federal Reserve System (U.S.).
  2. Fernando Alvarez & Francesco Lippi, 2010. "Persistent Liquidity Effect and Long Run Money Demand," EIEF Working Papers Series 1017, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2010.
  3. Noritaka Kudoh, 2009. "A global analysis of liquidity effects, interest rate rules, and deflationary traps," Economics Bulletin, AccessEcon, vol. 29(2), pages 1492-1498.

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