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Search in Financial Markets, and Monetary Policy

Author

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  • Scott Hendry
  • Kevin Moran

Abstract

We extend a standard monetary quantitative model to provide a richer role for financial intermediaries and to generate greater persistence in the effects of monetary policy shocks. We first assume that existing clients of banks operate a diminishing returns to scale technology. Second, we assume that banks enter into contact with suitable new clients via a search-and-matching mechanism similar to that used to study labour markets; here, the nominal interest rate is the instrument that implements the sharing of the net surplus associated with a bank-entrepreneur match. Operating in such a world, banks have an incentive to set aside a fraction of any unexpected liquidity injection to search for new clients, delaying the entry of the injection in the economic system. Further, the initial liquidity injection generates persistent changes in the relative bargaining weights of banks and entrepreneurs, affecting the sharing of net surpluses and thus the nominal interest rate that implements it. The combination of these two effects is shown to add persistence to the decrease in nominal interest rates that follows monetary policy easings and to create hump-shaped responses in output and inflation

Suggested Citation

  • Scott Hendry & Kevin Moran, 2004. "Search in Financial Markets, and Monetary Policy," Computing in Economics and Finance 2004 126, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:126
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    Cited by:

    1. Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series 19, Villanova School of Business Department of Economics and Statistics.

    More about this item

    Keywords

    search and matching; financial markets; monetary policy;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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