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Increased strength of monetary policy

André C. Silva
Publication Year 
Firms cash holdings distribution changed substantially from 1980 to 2013. We study the effects of this change in the formulation of monetary policy using a model with financial segmentation. We find that the interest rate channel of the transmission mechanism of monetary policy has become more powerful, as the impact of monetary policy over the real interest rate increased. Now, with the increase in firm cash holdings, the real interest rate takes 3.4 months more to return to its initial value after a shock to the nominal interest rate.
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