We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. This paper is the first to formally estimate such a model, evaluate its fit based on postwar U.S. data, and assess its money demand properties.
Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-offsS. Boragan Aruoba and Frank Schorfheide ,
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American Economic Journal: Macroeconomics