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Endogenously Segmented Market in a Search-Theoretic Model of Monetary Exchange

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  • Jonathan Chiu

    ()
    (MFA Bank of Canada)

  • Miguel Molico

Abstract

This paper studies the long run effects of monetary policy in a micro-founded model with trading frictions and endogenous market segmentation. Agents must pay a fixed cost to participate in a centralized liquidity market. By endogenizing the participation decision, this model endogenizes the responses of velocity, output, the degree of market segmentation, as well as the distribution of money. As inflation decreases, agents are induced to participate less frequently in the centralized liquidity market, leading to a lower velocity of money, a smaller liquidity market, fewer resources spent on market participation and higher heterogeneity in money holdings across agents. The welfare costs of inflation implied are different from previous papers in the literature since inflation can distort the agents consumption profile, affect market participation, and redistribute money holdings. The model provides a general framework that nests several existing search models as special cases for different specifications of the fixed cost.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 441.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:441

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Related research

Keywords: search; money; monetary policy; inflation; market segmentation;

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Cited by:
  1. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: methods," Staff Report 442, Federal Reserve Bank of Minneapolis.
  2. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.

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