Monetary policy with sticky prices and segmented markets

Tomoyuki Nakajima

Economic Theory, 2006, vol. 27, issue 1, 163-177

Abstract: 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. Copyright Springer-Verlag Berlin/Heidelberg 2006

Keywords: Monetary policy; Sticky prices; Segmented markets; Liquidity effect; Taylor rule. (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s00199-004-0579-0

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