A Segmented Markets Model of Inflation

Frank Browne and David Cronin
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Frank Browne: Central Bank and Financial Services Authority of Ireland
David Cronin: Central Bank and Financial Services Authority of Ireland

No 17/RT/06, Research Technical Papers from Central Bank of Ireland

Abstract: Models of inflation usually have monetary policy impacting the economy through either an interest rate or a monetary/credit quantity channel but not through both. We argue that policy is transmitted via two distinct types of agents – those that are and that are not liquidity constrained. The implication is that both channels must be seen as complementary, joint indicators of inflation and must both be incorporated in models of inflation. We provide a formal representation of price level determination and behaviour in this segmented markets framework and evaluate it econometrically using US data. Length: 32 pages

Date: 2006-12
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