Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium

Javier Andrés (), López-Salido, J David and Edward Nelson ()

No 4336, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this Paper, we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets. This is specified in a manner that captures Tobin’s (1969) view that an expansion of one asset’s supply affects both the yield on that asset and the spread or ‘risk premium’ between returns on that asset and alternative assets. Our estimates of this model on US data confirm that some of the observed deviations of long-term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets. The richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy. Our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities, and so exert an extra effect on long-term yields and aggregate demand separate from their effect on the expected path of short-term rates.

Keywords: imperfect asset substitution; monetary policy; term structure; transmission mechanism (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: Written
View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP4336.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Tobin's imperfect asset substitution in optimizing general equilibrium (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:4336

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP4336.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().