Financial Market Segmentation, Stock Market Volatility and the Role of Monetary Policy

Zervou, Anastasia

doi:10.2139/ssrn.1983660

Cited by 5 publications

(6 citation statements)

References 45 publications

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“…Our interest in monetary models that feature liquidity effects based on segmented asset markets is to provide a framework for studying policy questions on the effects of monetary shocks, such as those analyzed in e.g. Lahiri, Singh, and Vegh (2007), Nakajima (2006), Lama and Medina (2007), Khan and Thomas (2007), King and Thomas (2008), Bilbiie (2008), Curdia and Woodford (2008), and Zervou (2008). Comparing with this literature, we have deliberately kept the model as simple as possible.…”

Section: Discussionmentioning

confidence: 99%

Persistent Liquidity Effects and Long Run Money Demand

Álvarez

Lippi

2011

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We present a monetary model in the presence of segmented asset markets that implies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. At the same time, the model has completely classical long-run predictions, featuring quantity theoretic and Fisherian properties. The model simultaneously explains the short-run "instability" of money demand estimates as-well-as the stability of long-run interest-elastic money demand.

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Section: Discussionmentioning

confidence: 99%

Persistent Liquidity Effects and Long Run Money Demand

Álvarez

Lippi

2011

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“…Our interest in monetary models that feature liquidity effects based on segmented asset markets is to provide a framework for studying policy questions on the effects of monetary shocks, such as those analyzed in e.g., Lahiri, Singh, and Végh (2007); Nakajima (2006); Lama and Medina Guzman (2007); Khan and Thomas (2007); King and Thomas (2008); Bilbiie (2008); Cúrdia and Woodford (2008);and Zervou (2013). Comparing with this literature, we have deliberately kept the model as simple as possible.…”

Section: Discussionmentioning

confidence: 99%

Persistent Liquidity Effects and Long-Run Money Demand

Álvarez

Lippi

2014

American Economic Journal: Macroeconomics

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We present a monetary model with segmented asset markets that implies a persistent fall in interest rates after a once-and-for-all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. The model simultaneously explains the short-run "instability" of money demand estimates as well as the stability of long-run interest-elastic money demand. (JEL E13, E31, E41, E43, E52, E62) T his paper unifies two main views, or theories, on money demand. One is the transactions-based money demand that emerges in the models of, e.g., BaumolTobin or Sidrauski. This theory predicts a stable downward sloping relationship between real balances and interest rates. This relationship is apparent in the lowfrequency data, e.g., those describing decade to decade movements. The second theory is the so called "liquidity effect," namely that a central bank's purchase of bonds, which increases the amount of money, creates a transitory but persistent decrease in interest rates. These patterns are apparent in high-frequency data, such as those used in the VAR literature for the identification of monetary shocks. This paper presents an analytically tractable model with segmented asset markets that unifies both ideas, displaying a stable long-run money demand, and explaining its short-term "instability" in terms of the liquidity effect. A new element of our model is a full characterization of the gradual propagation mechanism of monetary shocks in terms of a few structural parameters.

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“…The superior rate of return that can be earned by asset market participant savers then generates a positive nominal interest rate in the economy, and risk sharing can be a key concern of policymakers. Some analysis with this ‡avor includes Alvarez, Lucas, and Weber (2001) and Zervou (2013).…”

Section: Recent Related Literaturementioning

confidence: 99%