Monetary policy, endogenous transactions, and financial market segmentation

An endogenous financial market segmentation model is constructed to explore the role of costly credit as a medium of exchange in the monetary policy elasticity of financial market activity. Against inflation risk, credit is an alternative insurance device to a cash transfer from the financial market. In equilibrium, credit reduces the financial market activity rate. Monetary policy has redistributive effects across economic individuals. Inflation may not tax financial market non-participants. However, it may tax financial market participants by increasing the financial market activity rate. Welfare may increase and the optimal money growth rate can be positive. (C) 2015 Elsevier Inc. All rights reserved.