Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-27T05:29:31.841Z Has data issue: false hasContentIssue false
  • English
  • Français

ENDOGENOUSLY SEGMENTED ASSET MARKET IN AN INVENTORY-THEORETIC MODEL OF MONEY DEMAND

Published online by Cambridge University Press:  13 September 2012

Jonathan Chiu
Jonathan Chiu*
Affiliation:
Bank of Canada
*
Address correspondence to: Jonathan Chiu, 234 Wellington Street, Ottawa, Ontario K1A 0G9, Canada; e-mail: jchiu@bankofcanada.ca.
Get access Rights & Permissions [Opens in a new window]

Abstract

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. In contrast to exogenous segmentation models in the literature, the timing of money transfers is endogenous. As a result, the model endogenizes the degree of market segmentation as well as the magnitudes of liquidity effects, price sluggishness, and the variability of velocity. I first show that the endogenous segmentation model can generate the positive long-run relationship between money growth and velocity observed in the data, which the exogenous segmentation model fails to capture. I also show that the short-run effects of money shocks on prices, inflation, and nominal interest rates are not robust.

Keywords

InflationLiquidity EffectInventory TheoryMoney Demand
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 438 - 472
Copyright
Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alvarez, Fernando, Atkeson, Andrew, and Edmond, Chris (2009) Sluggish responses of prices and inflation to monetary shocks in an inventory model of money demand. Quarterly Journal of Economics 124 (3), 911–967.CrossRefGoogle Scholar
Alvarez, Fernando, Atkeson, Andrew, and Kehoe, Patrick J.(1999) Money and Interest Rates with Endogenously Segmented Markets. NBER working paper 7060.Google Scholar
Baumol, William J. (1952) The transactions demand for cash: An inventory theoretic approach. Quarterly Journal of Economics 66 (4), 545–556.CrossRefGoogle Scholar
Chatterjee, Satyajit and Corbae, Dean (1992) Endogenous market participation and the general equilibrium value of money. Journal of Political Economy 100 (3), 615–646.Google Scholar
Chiu, Jonathan and Meh, Cesaire (2011) Financial intermediation, liquidity, and inflation. Macroeconomic Dynamics 15 (S1), 83–118.Google Scholar
Chiu, Jonathan and Molico, Miguel (2010) Liquidity, redistribution, and the welfare cost of inflation. Journal of Monetary Economics 57 (4), 428–438.CrossRefGoogle Scholar
Christiano, Lawrence J. (1991) Modeling the liquidity effect of a money shock. Federal Reserve Bank of Minneapolis Quarterly Review 15 (1), 3–34.Google Scholar
Christiano, Lawrence J. and Eichenbaum, Martin (1995) Liquidity effects, monetary policy, and the business cycle. Journal of Money, Credit and Banking 27 (4) Part 1, 1113–1136.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles (1997) Sticky price and limited participation models of money: A comparison. European Economic Review 41 (6), 1201–1249.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles (2005) Nominal rigidities and the dynamic effects of shocks to monetary policy. Journal of Political Economy 113, 1–45.Google Scholar
Cochrane, John H. (1989) The return of the liquidity effect: A study of the short-run relation between money growth and interest rates. Journal of Business and Economic Statistics 7 (1), 75–83.Google Scholar
Dotsey, Michael and King, Robert G. (2001) Pricing, Production and Persistence. NBER working paper 8407.Google Scholar
Edge, Rochelle M. (2000) Time-to-Build, Time-to-Plan, Habit-Persistence, and the Liquidity Effect. International finance discussion paper 673.Google Scholar
Ennis, Huberto M. (2009) Avoiding the inflation tax. International Economic Review 50 (2), 607–625.Google Scholar
Gordon, David B. and Leeper, Eric M. (1994) The dynamic impacts of monetary policy: an exercise in tentative identification. Journal of Political Economy 102 (6), 1228–1247.Google Scholar
Grossman, Sanford J. (1987) Monetary dynamics with proportional transaction costs and fixed payment periods. In Barnett, William A. and Singleton, Kenneth J.(eds.), New Approaches to Monetary Economics: Proceedings of the Second International Symposium in Economic Theory and Econometrics, pp. 3–41. Cambridge, UK: Cambridge University Press.Google Scholar
Grossman, Sanford J. and Weiss, Laurence (1983) A transactions-based model of the monetary transmission mechanism. American Economic Review 73 (5), 871–80.Google Scholar
Hamilton, James D. (1997) Measuring the liquidity effect. American Economic Review 87 (1), 80–97.Google Scholar
Hodrick, Robert J., Kocherlakota, Narayana, and Lucas, Deborah (1991) The variability of velocity in cash-in-advance models. Journal of Political Economy 99 (2), 358–384.CrossRefGoogle Scholar
Jovanovic, Boyan (1982) Inflation and welfare in the steady state. Journal of Political Economy 90 (3), 561–577.Google Scholar
Kandil, Magda (1995) Asymmetric nominal flexibility and economic fluctuations. Southern Economic Journal 61 (3), 674–695.Google Scholar
Keen, Benjamin D. (2001) In Search of the Liquidity Effect in a Modern Monetary Model. Manuscript.Google Scholar
Khan, Aubhik and Thomas, Julia K. (2010) Inflation and Interest Rates with Endogenous Market Segmentation. Manuscript, Ohio State University.Google Scholar
Lai, Pikki and Cover, James Peery (1996) Asymmetric effects of money-supply shocks on prices: International evidence. Journal of Economic Research, 1 (2), 273–284.Google Scholar
Lai, Pikki and Cover, James Peery (1999) Does inflation cause the asymmetric effects of money supply shocks. Journal of Economic Research, 4 (2), 1–15.Google Scholar
Lastrapes, William D. and McMillin, W. Douglas (2004) Cross-country variation in the liquidity effect: The role of financial markets. Economic Journal, Royal Economic Society 114 (498), 890–915.Google Scholar
Li, Yan (2011) Limited participation, labor market search and liquidity effects. Macroeconomic Dynamics 15 (2), 201–222.Google Scholar
Liu, Lucy, Wang, Liang, and Wright, Randall (2011) On the “hot potato” effect of inflation: Intensive versus extensive margins. Macroeconomic Dynamics 15 (S2), 191–216.Google Scholar
Rhee, Wooheon (1995) Asymmetric effects of money on inflation: Evidence from Korean data. International Economic Journal 9 (4), 31–42.Google Scholar
Romer, David (1986) A simple general equilibrium version of the Baumol–Tobin model. Quarterly Journal of Economics 101 (4), 663–685.Google Scholar
Rotemberg, Julio J. (1984) A monetary equilibrium model with transactions costs. Journal of Political Economy 92 (1), 40–58.Google Scholar
Sanches, Daniel and Williamson, Stephen (2011) Adverse selection, segmented markets, and the role of monetary policy. Macroeconomic Dynamics 15 (S2), 269–292.Google Scholar
Shen, Chung-Huaand and Chiang, Thomas Chi-Nan (1999) Retrieving the vanishing liquidity effect: A threshold vector autoregressive model. Journal of Economics and Business 51 (3), 259–277.Google Scholar
Strongin, Steven (1995) The identification of monetary policy disturbances explaining the liquidity puzzle. Journal of Monetary Economics 35 (3), 463–497.CrossRefGoogle Scholar
Tobin, James (1956) The interest-elasticity of transactions demand for cash. Review of Economics and Statistics 38 (3), 241–247.Google Scholar
Wang, Weimin and Shi, Shouyong (2006) The variability of velocity of money in a search model. Journal of Monetary Economics 53 (3), 537–571.Google Scholar
Weise, Charles L. (1999) The asymmetric effects of monetary policy: A nonlinear vector autoregression approach. Journal of Money, Credit and Banking 31 (1), 85–108.CrossRefGoogle Scholar