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Money and Interest Rates with Endogeneously Segmented Markets

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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 interest rates, flatten the yield curve, and lead to a downward-sloping yield curve on average. In contrast sufficiently segmented, then persistent money injections decrease nominal interest rates, steepen or even twist the yield curve, and lead to an upward-sloping yield curve on average.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7060.

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Date of creation: Mar 1999
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Publication status: published as Alvarez, Fernanco, Andre Atkeson and Patrick J. Kehoe. "Money, Interest Rates, And Exchange Rates With Endogenously Segmented Markets," Journal of Political Economy, 2002, v110(1,Mar), 73-112.
Handle: RePEc:nbr:nberwo:7060

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  1. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  2. David K. Backus & Stanley E. Zin, 1994. "Reverse Engineering the Yield Curve," NBER Working Papers 4676, National Bureau of Economic Research, Inc.
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  7. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 49(1), pages 53-111, December.
  8. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 893-920, October.
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  13. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(3), pages 619-640, December.
  14. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 615-46, June.
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Cited by:
  1. Marcus Hagedorn, 2007. "A Monetary Model with Strong Liquidity Effects," IEW - Working Papers 353, Institute for Empirical Research in Economics - University of Zurich.
  2. 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.
  3. Filippo Occhino, 2001. "Monetary Policy Shocks in an Economy with Segmented Markets," Departmental Working Papers, Rutgers University, Department of Economics 200108, Rutgers University, Department of Economics.
  4. Matthias Doepke, 2002. "Show Me The Money: Retained Earnings And The Real Effects Of Monetary Shocks," UCLA Economics Working Papers, UCLA Department of Economics 820, UCLA Department of Economics.

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