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A Two-Agent Model of Inflation

Frank Browne () and David Cronin
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Frank Browne: Trinity College Dublin, College Green, Dublin 2

Credit and Capital Markets, 2018, vol. 51, issue 3, 367-388

Abstract: Models of inflation usually have monetary policy affecting the economy through either an interest rate channel or a monetary/credit quantity channel but not through both simultaneously. It is argued here that policy is transmitted via two distinct types of agents – those that are and that are not liquidity-constrained. The implication is that both interest rate and monetary channels must be seen as complementary, joint indicators of inflation and must both be incorporated into models of inflation. A formal representation of price level determination and behaviour in this two-agent framework is provided and evaluated econometrically using US data.

Keywords: inflation; monetary policy; liquidity constraints (search for similar items in EconPapers)
JEL-codes: E31 E41 E51 E52 (search for similar items in EconPapers)
Date: 2018
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