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

Author

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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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    Citations

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    Cited by:

    1. Hirokazu Ishise Nao Sudo, 2013. "Inventory‐Theoretic Money Demand and Relative Price Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2‐3), pages 299-326, March.
    2. Occhino Filippo, 2006. "Existence of Equilibrium for Segmented Markets Models with Interest Rate Monetary Policies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-19, December.
    3. 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.
    4. Julia K. Thomas & Aubhik Khan, 2005. "Inflation and Interest Rates with Endogenous Market Segmentation," 2005 Meeting Papers 170, Society for Economic Dynamics.
    5. Filippo Occhino, 2004. "Markets Segmentation and the Real Interest Rate Response to Monetary Policy Shocks," Departmental Working Papers 200403, Rutgers University, Department of Economics.
    6. Areosa, Waldyr Dutra & Areosa, Marta B.M., 2016. "The inequality channel of monetary transmission," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 214-230.
    7. 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.
    8. Landon-Lane, John & Occhino, Filippo, 2008. "Bayesian estimation and evaluation of the segmented markets friction in equilibrium monetary models," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 444-461, March.
    9. Andra Ghent, 2012. "Infrequent Housing Adjustment, Limited Participation, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 931-955, August.
    10. Michael D. 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," Economics Working Papers 16113, Hoover Institution, Stanford University.
    11. Mizrach, Bruce & Occhino, Filippo, 2008. "The impact of monetary policy on bond returns: A segmented markets approach," Journal of Economics and Business, Elsevier, vol. 60(6), pages 485-501.
    12. 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.
    13. 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.
    14. John Landon-Lane & Filippo Occhino, 2005. "Estimation and Evaluation of a Segmented Markets Monetary Model," Departmental Working Papers 200505, Rutgers University, Department of Economics.
    15. Zeno Enders, 2020. "Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy," Economic Journal, Royal Economic Society, vol. 130(628), pages 1031-1056.
    16. Enders, Zeno, 2010. "Heterogeneous consumers, segmented asset markets, and the effects of monetary policy," Bonn Econ Discussion Papers 08/2010, University of Bonn, Bonn Graduate School of Economics (BGSE).
    17. Filippo Occhino, 2004. "Markets Segmentation and the Hump-Shaped Response of Output to Monetary Policy Shocks," 2004 Meeting Papers 295, Society for Economic Dynamics.
    18. 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.
    19. 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.
    20. Claudia M. Buch & Christian Pierdzioch, 2009. "Low Skill but High Volatility?," CESifo Working Paper Series 2665, CESifo.

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    More about this item

    Keywords

    segmented markets; limited participation; monetary policy shocks; persistence;
    All these keywords.

    JEL classification:

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

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Advanced Monetary Theory and Policy (ECON 447)

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