Revisiting the Tale of Two Interest Rates with Endogenous Asset Market Segmentation
نویسندگان
چکیده
We develop a monetary model that is unique in its ability to deliver a negative correlation between aggregate consumption growth and short-term real interest rates consistent with U.S. data. The essential ingredient to this success is endogenous asset market segmentation permitting the extent of household participation in asset markets to vary smoothly with changes in aggregate conditions. Households in our model 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. While we impose no stickiness at the microeconomic level in either prices or portfolio adjustment, our model drives gradual adjustment in the aggregate price level following a monetary shock and thus persistent non-neutralities. In our model, households can alter the timing of their trading activities in response to changes in both individual and aggregate states. We show that this added flexibility relative to fixed segmentation models can substantially reinforce the sluggishness in aggregate price adjustment following a monetary shock, and it can transform dramatic, transitory changes in real and nominal interest rates into more moderate and persistent liquidity effects. When we extend our setting to consider production, we find that small changes in household participation rates add substantial persistence to movements in inflation, and they deliver persistence in real interest rates that is otherwise absent. These changes are also critically important to our model’s success in reproducing the empirical correlation between aggregate consumption growth and real interest rates; when they are suppressed, the success is lost. ∗We thank Chris Edmond for discussions that substantially influenced this work.
منابع مشابه
Ination and Interest Rates with Endogenous Market Segmentation
We examine a monetary economy wherein endogenous asset market segmentation permits the extent of household participation in open market operations to smoothly vary with changes in aggregate conditions. While we impose no stickiness at the microeconomic level in either prices or portfolio adjustment, we nd that our exible asset market segmentation can deliver gradual adjustment in the aggregat...
متن کاملA Defined Benefit Pension Fund ALM Model through Multistage Stochastic Programming
We consider an asset-liability management (ALM) problem for a defined benefit pension fund (PF). The PF manager is assumed to follow a maximal fund valuation problem facing an extended set of risk factors: due to the longevity of the PF members, the inflation affecting salaries in real terms and future incomes, interest rates and market factors affecting jointly the PF liability and asset p...
متن کاملA Review of the Impact of Monetary Policy Shocks and Asset Markets' Behavior on Affordability of Urban Housing Prices in Iran
The purpose of this paper is to study the behavior of the housing price affordability index in the urban areas of Iran during the 1992-2017 period, and to explain the effect of monetary policy shocks and asset marketschr('39') performance on this index during the referred period. The Granger Cointegration Test was used to study the behavior of the mentioned index and the SVAR Model was applied ...
متن کاملThe Effects of Interest Rates Volatility on Stock Returns: Evidence from Bangladesh
The paper investigates the effects of interest rates on stock market performance by using monthly time series data for the economy of Bangladesh over the period of 1991 to 2012. A wide range of econometric techniques have been employed to analyze the relationship between the interest rate and stock market return. The study reveals a stable and significant long run relationship between the varia...
متن کامل