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ADVERSE SELECTION, SEGMENTED MARKETS, AND THE ROLE OF MONETARY POLICY

Published online by Cambridge University Press:  24 June 2011

Daniel Sanches  and
Stephen Williamson
Daniel Sanches
Affiliation:
Federal Reserve Bank of Philadelphia
Stephen Williamson*
Affiliation:
Washington University in St. LouisRichmond Federal Reserve Bank and Federal Reserve Bank of St. Louis
*
Address correspondence to: Stephen Williamson, Department of Economics, Washington University in St. Louis, Campus Box 1208, St. Louis, MO 63130, USA; e-mail: [email protected].
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Abstract

A model is constructed in which trading partners are asymmetrically informed about future trading opportunities and spatial and informational frictions limit arbitrage between markets. These frictions create 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.

Keywords

Asymmetric InformationPrice DispersionSegmented MarketsFriedman Rule
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S2: Money, Credit, and Liquidity: Part 2 , September 2011 , pp. 269 - 292
Copyright
Copyright © Cambridge University Press 2011

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References

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