Heterogeneous asset valuation in OTC markets and optimal inflation

Athanasios Geromichalos and Kuk Mo Jung

Journal of Economic Dynamics and Control, 2024, vol. 161, issue C

Abstract: Building on recent work in monetary theory and finance, we develop a framework where money serves a double liquidity role, namely, it serves as a medium of exchange in goods markets as well as asset markets. We argue that studying such a framework is not only more empirically relevant, but also gives rise to new, important economic insights regarding the effects of inflation on welfare and asset prices. The main result of the paper is that, contrary to conventional wisdom, in our model welfare can be increasing in inflation due to a new channel whereby higher inflation promotes beneficial trade in the secondary asset market.

Keywords: Monetary-search models; Liquidity; Asset prices; Over-the-counter markets; Inflation-welfare relationship (search for similar items in EconPapers)
JEL-codes: E31 E50 E52 G12 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:161:y:2024:i:c:s0165188924000162

DOI: 10.1016/j.jedc.2024.104824

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