A Monetary Model of Bilateral Over-the-Counter Markets

Ricardo Lagos and Shengxing Zhang

Review of Economic Dynamics, 2019, vol. 33, 205-227

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 such assets as stocks and housing and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous. We provide novel theoretical implications and empirical evidence regarding the effect of monetary policy on the liquidity of these markets. (Copyright: Elsevier)

Keywords: Money; Liquidity; OTC markets; Asset prices; Fed model (search for similar items in EconPapers)
JEL-codes: D83 E31 E52 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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DOI: 10.1016/j.red.2019.01.004

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