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Existence of Equilibrium for Segmented Markets Models with Interest Rate Monetary Policies

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Author Info
Filippo Occhino () (Rutgers University)

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Abstract

Several papers have recently adopted the segmented markets model as a framework for monetary analysis. The characteristic assumption is that some households never participate in financial markets. This paper proves the existence of an equilibrium for segmented markets models where monetary policy is defined in terms of the short-term nominal interest rate. The model allows to consider the important cases where monetary policy affects output, and responds to any source of uncertainty, including output itself. The assumptions required for existence constrain the maximum value and the variability of the nominal interest rate. The period utility function is logarithmic. The proof is constructive, and shows how the model can be solved numerically. A similar proof can be used in the case that monetary policy is defined in terms of the bond supply. Length: 20 pages

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200411.

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Date of creation: 20 May 2004
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Handle: RePEc:rut:rutres:200411

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Related research
Keywords: segmented markets; limited participation; interest rate monetary policy; existence;

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Find related papers by JEL classification:
C60 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001. "Interest rates and inflation," Working Papers 609, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Lahiri, Amartya & Singh, Rajesh & Vegh, Carlos, 2007. "Segmented asset markets and optimal exchange rate regimes," Journal of International Economics, Elsevier, vol. 72(1), pages 1-21, May. [Downloadable!] (restricted)
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  4. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February. [Downloadable!] (restricted)
  5. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April. [Downloadable!] (restricted)
  6. Florin O. Bilbiie, 2004. "The great inflation, limited asset markets participation and aggregate demand: FED policy was better than you think," Working Paper Series 408, European Central Bank. [Downloadable!]
  7. Filippo Occhino, 2004. "Modeling the Response of Money and Interest Rates to Monetary Policy Shocks: A Segmented Markets Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 181-197, January. [Downloadable!] (restricted)
  8. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December. [Downloadable!] (restricted)
  9. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September. [Downloadable!] (restricted)
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  10. Robert E. Lucas, Jr. & Nancy L. Stokey, 1987. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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