Open-Market Operations, Asset Distributions, and Endogenous Market Segmentation

Babak Mahmoudi

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the long-run effects of open-market operations on the distributions of assets and prices in the economy. It offers a theoretical framework to incorporate multiple asset holdings in a tractable heterogeneous-agent model, in which the central bank implements policies by changing the supply of nominal bond and money. This model features competitive search, which produces distributions of money and bond holdings as well as price dispersion among submarkets. At a high enough bond supply, the equilibrium shows segmentation in the asset market; only households with good income shocks participate in the bond market. When deciding whether to participate in the asset market, households compare liquidity services provided by money with returns on bond. Segmentation in the asset market is generated endogenously without assuming any rigidities or frictions in the asset market. In an equilibrium with a segmented asset market, open-market operations affect households’ participation decisions and, therefore, have real effects on the distribution of assets and prices in the economy. Numerical exercises show that the central bank can improve welfare by purchasing bonds and supplying money when the asset market is segmented.

Keywords: Open-Market Operation; Distributional Effects; Segmented Asset Market; Heterogeneous Agents; Competitive Search (search for similar items in EconPapers)
JEL-codes: E00 E4 E5 (search for similar items in EconPapers)
Date: 2013-09-21
New Economics Papers: this item is included in nep-dge and nep-mac
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https://mpra.ub.uni-muenchen.de/54879/1/MPRA_paper_54879.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50089

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