A Monetary Model of Bilateral Over-the-Counter Markets

Ricardo Lagos and Shengxing Zhang

No 25239, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and the market microstructure where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous.

JEL-codes: D83 E31 E52 G12 (search for similar items in EconPapers)
Date: 2018-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: AP ME
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Published as Ricardo Lagos & Shengxing Zhang, 2019. "A monetary model of bilateral over-the-counter markets," Review of Economic Dynamics, .

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