We formulate a central bank's problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely lived households in an economy with constant aggregate income and public information. Households are segmented into agents who store value in currency alone and agents who have access to both currency and loans. We show that the optimum inflation rate is positive, because inflation reduces the value of the outside option for credit agents and raises their debt limits.

An asset market segmentation model is constructed to study the distributional effects of monetary policy when economic individuals can choose means of payment among alternatives. In equilibrium, monetary policy has two distributional effects: a direct effect and an indirect effect through the choice of means of payment. When the government injects money, some purchase a greater variety of goods with cash whereas others purchase a greater variety of goods with credit. Credit can dampen fluctuations in consumption arising from monetary policy. The optimal money growth rate can be positive or negative. The Friedman rule is not optimal in general.

This paper models the liquidity effects after a contractionary open market operation in a framework that highlights the frictions of limited participation in financial markets and search frictions in labor markets. It is shown that Lucas rigidities, with the aid of labor market rigidities, could generate more persistent liquidity effects even in a context of flexible prices. In addition, the simulation results show that this adapted liquidity and labor search model does a reasonable good job in explaining the observed labor market dynamics in response to shocks of a plausible magnitude, and deliver substantial movements along a downward-sloping Beveridge curve.

Following a contractionary monetary policy shock, the aggregate output decreases over time for six to eight quarters, while the real interest rate increases immediately and remains high for three quarters, which can hardly be replicated by models characterized by a standard consumption Euler equation. This paper adopts a segmented markets framework where some households are permanently excluded from financial markets. The aggregate output and the nominal interest rate are modeled as exogenous autoregressive processes, while the real interest rate is determined endogenously. For intermediate levels of market segmentation, the model is able to account for both the persistent decreasing path of the aggregate output and the persistent increase in the real interest rate which follow an unanticipated increase in the nominal interest rate. The sign, the size and the persistence of the responses of the real interest rate and the money growth rate are close to those in the data.