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Endogenously Segmented Asset Market in an Inventory Theoretic Model of Money Demand

  • Jonathan Chiu

    ()

    (Economics University of Western Ontario)

This paper studies the effects of monetary policy in an inventory theoretic model of money demand. In this model, agents keep inventories of money, despite the fact that money is dominated in rate of return by interest bearing assets, because they must pay a fixed cost to transfer funds between the asset market and the goods market. Unlike the exogenous segmentation models in the literature, the timings of money transfers are endogenous. By allowing agents to choose the timings of money transfers, the model endogenizes the degree of market segmentation as well as the magnitude of liquidity effects, price sluggishness and variability of velocity. First, I show that the endogenous segmentation model can generate the positive long run relationship between money growth and velocity in the data which the exogenous segmentation model fails to capture. Second, I show that the short run effects of money shocks in an exogenous segmentation model (such as the linear inflation response to money shock, the liquidity effect and the sluggish price adjustment) are not robust. In an endogenous segmentation model, the equilibrium response to money shocks is non-linear and non-monotonic. Moreover, for large money shocks, there is no liquidity effect and no sluggish price adjustment.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 108.

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Date of creation: 2005
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Handle: RePEc:red:sed005:108
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  2. Weimin Wang & Shouyong Shi, 2006. "The Variability of Velocity of Money in a Search Model," Working Papers tecipa-190, University of Toronto, Department of Economics.
  3. Michael Dotsey & Robert G. King, 2005. "Pricing, production, and persistence," Working Papers 05-4, Federal Reserve Bank of Philadelphia.
  4. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-47, December.
  5. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
  6. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-46, June.
  7. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
  8. Robert J. Hodrick & Narayana Kocherlakota & Deborah Lucas, 1989. "The Variability of Velocity in Cash-In-Advance Models," NBER Working Papers 2891, National Bureau of Economic Research, Inc.
  9. Keen, Benjamin D., 2004. "In search of the liquidity effect in a modern monetary model," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1467-1494, October.
  10. Rochelle M. Edge, 2000. "Time-to-build, time-to-plan, habit-persistence, and the liquidity effect," International Finance Discussion Papers 673, Board of Governors of the Federal Reserve System (U.S.).
  11. Chris Edmond, 2005. "Sticky Demand or Sticky Prices?," 2005 Meeting Papers 117, Society for Economic Dynamics.
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