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Modeling the Response of Money and Interest Rates to Monetary Policy Shocks: A Segmented Markets Approach

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  • Filippo Occhino

    (Rutgers University)

Abstract

This paper models the dynamic response of the nominal interest rate, the money growth rate and the real interest rate to monetary policy shocks. The monetary authority controls the supply of short-term government securities directly, and the short-term nominal interest rate indirectly through open market operations. It sets the nominal interest rate as an exogenous stochastic process, and lets the money growth rate and the real interest rate be determined endogenously. Markets are segmented in the sense that some households are permanently excluded from the market in government securities. The model is able to replicate the persistent decrease in the money growth rate and the persistent increase in the real interest rate which follow an unexpected increase in the nominal interest rate. The size and the persistence of the responses are close to those in the data. Markets segmentation decreases the volatility of the money growth rate, increases the volatility of the real interest rate, and increases the persistence of both processes. (Copyright: Elsevier)

Suggested Citation

  • 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.
  • Handle: RePEc:red:issued:v:7:y:2004:i:1:p:181-197 DOI: 10.1016/S1094-2025(03)00047-4
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    References listed on IDEAS

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    Cited by:

    1. Occhino Filippo, 2006. "Existence of Equilibrium for Segmented Markets Models with Interest Rate Monetary Policies," The B.E. Journal of Theoretical Economics, De Gruyter, pages 1-19.
    2. Areosa, Waldyr Dutra & Areosa, Marta B.M., 2016. "The inequality channel of monetary transmission," Journal of Macroeconomics, Elsevier, pages 214-230.
    3. Landon-Lane, John & Occhino, Filippo, 2008. "Bayesian estimation and evaluation of the segmented markets friction in equilibrium monetary models," Journal of Macroeconomics, Elsevier, pages 444-461.
    4. Mizrach, Bruce & Occhino, Filippo, 2008. "The impact of monetary policy on bond returns: A segmented markets approach," Journal of Economics and Business, Elsevier, pages 485-501.
    5. Julia K. Thomas & Aubhik Khan, 2005. "Inflation and Interest Rates with Endogenous Market Segmentation," 2005 Meeting Papers 170, Society for Economic Dynamics.
    6. Marta B. M. Areosa & Waldyr D. Areosa & Pierre Monnin, 2016. "How Would Monetary Policy Look Like if John Rawls Had Been Hired as a Chairman of the Fed?," Working Papers Series 447, Central Bank of Brazil, Research Department.
    7. Enders, Zeno, 2012. "Heterogeneous consumers, segmented asset markets, and the effects of monetary policy," Working Papers 0537, University of Heidelberg, Department of Economics.
    8. Filippo Occhino, 2004. "Markets Segmentation and the Hump-Shaped Response of Output to Monetary Policy Shocks," 2004 Meeting Papers 295, Society for Economic Dynamics.
    9. Fernando Alvarez & Francesco Lippi, 2014. "Persistent Liquidity Effects and Long-Run Money Demand," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 71-107, April.
    10. Zeno Enders, 2010. "Heterogeneous consumers, segmented asset markets,and the effects of monetary policy," Bonn Econ Discussion Papers bgse08_2010, University of Bonn, Germany.
    11. Bruce Mizrach & Filippo Occhino, 2004. "The Impact of Monetary Policy on Bond Returns Volatility: A Segmented Markets Approach," Departmental Working Papers 200402, Rutgers University, Department of Economics.
    12. Filippo Occhino, 2004. "Markets Segmentation and the Real Interest Rate Response to Monetary Policy Shocks," Departmental Working Papers 200403, Rutgers University, Department of Economics.
    13. John Landon-Lane & Filippo Occhino, 2004. "A Likelihood-Based Evaluation of the Segmented Markets Friction in Equilibrium Monetary Models," Departmental Working Papers 200415, Rutgers University, Department of Economics.
    14. Michael Bordo & Arunima Sinha, 2016. "A Lesson from the Great Depression that the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing," NBER Working Papers 22581, National Bureau of Economic Research, Inc.
    15. Bilbiie, Florin O., 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.
    16. John Landon-Lane & Filippo Occhino, 2005. "Estimation and Evaluation of a Segmented Markets Monetary Model," Departmental Working Papers 200505, Rutgers University, Department of Economics.
    17. Enders, Zeno, 2017. "Heterogeneous consumers, segmented asset markets, and the real effects of monetary policy," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168227, Verein für Socialpolitik / German Economic Association.
    18. Enders, Zeno, 2017. "Heterogeneous consumers, segmented asset markets, and the real effects of monetary policy," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168227, Verein für Socialpolitik / German Economic Association.
    19. Aubhik Khan & Julia Thomas, 2015. "Revisiting the Tale of Two Interest Rates with Endogenous Market Segmentation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 243-268, April.
    20. Claudia M. Buch & Christian Pierdzioch, 2009. "Low Skill but High Volatility?," CESifo Working Paper Series 2665, CESifo Group Munich.

    More about this item

    Keywords

    segmented markets; limited participation; monetary policy shocks; persistence;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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    1. Advanced Monetary Theory and Policy (ECON 447)

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