Adverse Selection, Segmented Markets, and the Role of Monetary Policy

Williamson, Stephen and Sanches, Daniel (2009): Adverse Selection, Segmented Markets, and the Role of Monetary Policy.

Abstract

A model is constructed in which trading partners are asymmetrically informed about future trading opportunities and where spatial and informational frictions limit arbitrage between markets. These frictions create an inefficiency relative to a full information equilibrium, and the extent of this inefficiency is affected by monetary policy. A Friedman rule is optimal under a wide range of circumstances, including ones where segmented markets limit the extent of monetary policy intervention.

• Item Type: MPRA Paper
• Language: English
• Keywords: Adverse Selection; Monetary Policy; Search
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates

References

Ennis, Huberto (2008) Search, money, and inflation under private information. Journal of Economic Theory 138, 101-131.

Maskin, Eric and John Riley (1984) Monopoly with incomplete information. Rand Journal of Economics 2, 171-196.

Lagos, Ricardo and Randall Wright (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463-484.

Lucas, Robert (1972) Expectations and the neutrality of money. Journal of Economic Theory 4, 103-124.

Williamson, Stephen D. (2008) Monetary policy and distribution. Journal of Monetary Economics 55, 1038-1053.

Williamson, Stephen D. (2009) Transactions, credit, and central banking in a model of segmented markets. Review of Economic Dynamics 12.