Monetary policy with sticky prices and segmented markets |
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Authors: | Tomoyuki Nakajima |
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Institution: | (1) Institute of Economic Research, Kyoto University, 606-8501 Kyoto, Japan |
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Abstract: | Summary. We consider a sticky-price model with segmented asset markets, and examine its implications for monetary policy. Our finding is, first, that the response of the money supply growth rate to a money demand shock required to stabilize inflation is not affected by the existence of a liquidity effect, but the response of the nominal interest rate is. Second, when the monetary authority adopts a Taylor rule, whether or not it should be active to obtain local determinacy of equilibria depends on the existence of a liquidity effect. Our results suggest that the monetary authority should be careful about the existence and the degree of a liquidity effect particularly when the nominal interest rate is used as the policy instrument.Received: 11 February 2004, Revised: 1 November 2004 JEL Classification Numbers:
E3, E4, E5. |
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Keywords: | Monetary policy Sticky prices Segmented markets Liquidity effect Taylor rule |
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