Frictional asset reallocation under adverse selection

Florian Madison

No 261, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: The aim of this paper is to study asset reallocation in financial markets subject to search, bargaining, and information frictions, and to analyze the impact of monetary policy on equilibrium outcomes. The main results show that private information regarding the quality of an asset impairs its liquidity and reduces both trading volume and consumption. As a consequence, a positive liquidity differential between money and real assets emerges, resulting in an increased demand for fiat money, as observed since the eruption of the global financial crisis. A policy intervention replacing information sensitive assets with government bonds or fiat money, as done in the asset-purchase program implemented by the Federal Reserve Bank, improves welfare.

Keywords: Money; assets; search and matching; asymmetric information; signaling; undefeated equilibrium (search for similar items in EconPapers)
JEL-codes: D82 D83 E44 E52 G11 G12 (search for similar items in EconPapers)
Date: 2017-09, Revised 2018-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Frictional asset reallocation under adverse selection (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:261

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