Bayesian estimation and evaluation of the segmented markets friction in equilibrium monetary models

John Landon-Lane, Filippo Occhino

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

This paper develops, estimates and evaluates a heterogeneous agents segmented markets model with endogenous production and a monetary authority that follows a Taylor-type interest rate rule. We find that adding the segmented markets friction significantly improves the statistical out-of-sample prediction performance of the model, and helps generate delayed and realistic impulse response functions to monetary policy shocks. The estimated segmented markets model also outperforms the standard limited participation model, both in terms of marginal likelihood and of qualitative features of the impulse response function. We estimate the fraction of households participating in financial markets to be approximately 22%.

Original languageEnglish (US)
Pages (from-to)444-461
Number of pages18
JournalJournal of Macroeconomics
Volume30
Issue number1
DOIs
StatePublished - Mar 2008

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Limited participation
  • Markov chain Monte Carlo
  • Monetary policy shocks
  • Segmented markets
  • Taylor rule

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