Information, Liquidity, Asset Prices, and Monetary Policy

Benjamin Lester, Andrew Postlewaite and Randall Wright

The Review of Economic Studies, 2012, vol. 79, issue 3, 1209-1238

Abstract: What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange--i.e. it determines their liquidity. Recognizability and liquidity are endogenized by allowing agents to invest in information. We analyse the effects of monetary policy. There can be multiple equilibria, with different transaction patterns, and these patterns are not invariant to policy. We show that small changes in information may generate large responses in asset prices, allocations, and welfare. We also discuss some issues in international economics, including exchange rates and dollarization. Copyright , Oxford University Press.

Date: 2012
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