IDEAS home Printed from
   My bibliography  Save this paper

Inflation, Employment and Interest Rates in an Economy with Endogenous Market Segmentation


  • Aubhik Khan

    () (Research Federal Reserve Bank of Philadelphia)

  • Julia K. Thomas


Inflation, Employment and Interest Rates in an Economy with Endogenous Market Segmentation Aubhik Khan, Federal Reserve Bank of Philadelphia Julia K. Thomas, University of Minnesota We examine a monetary economy where households incur fixed transactions costs when exchanging bonds and money and, as a result, carry money balances in excess of current spending to limit the frequency of such trades. As only a fraction of households choose to actively trade bonds and money at any given time, the market is endogenously segmented. Moreover, because households in our model economy have the ability to alter the timing of their trading activities, the extent of market segmentation varies over time in response to real and nominal shocks. In endowment economies, this added flexibility can substantially reinforce both sluggishness in aggregate price adjustment and the persistence of liquidity effects in real and nominal interest rates relative to that seen in models with exogenously segmented markets. Small changes in the number of households actively participating in open market operations lead to changes in the distribution of money holdings across households that differ markedly from those in existing monetary models where the degree of market segmentation is fixed: (1) When shocks to money growth rates are transitory, these changes in distribution add persistence to inflation, and they transform sharp temporary movements in real interest rates into more moderate and gradual responses. (2) Under persistent money growth shocks, they imply prolonged liquidity effects in both real and nominal interest rates, as well as more gradual price adjustment. (3) Finally, when monetary policy is governed by an active Taylor rule, persistent real shocks cause persistent movements in inflation and interest rates only if households are allowed to respond to such shocks with changes in the timing of their portfolio reallocations. Our existing findings suggest that monetary models with endogenous market segmentation may be useful toward a better understanding of the relations between movements in real and nominal aggregate series observed in the data. Introducing production into this environment, we examine the extent to which the real effects of monetary policy, manifested through persistent changes in real interest rates and the distribution of consumption across households, are robust to endogenous responses in aggregate employment and investment. In doing so, we establish whether endogenous market segmentation can transmit these real effects beyond mere reallocation into persistent changes in aggregate output, employment and wages.

Suggested Citation

  • Aubhik Khan & Julia K. Thomas, 2006. "Inflation, Employment and Interest Rates in an Economy with Endogenous Market Segmentation," 2006 Meeting Papers 295, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:295

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Liquidity Effects; Inflation Persistence; Segmented Markets; (S; s) Policies;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed006:295. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.