Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy

Ricardo Lagos

Journal of Money, Credit and Banking, 2011, vol. 43, issue s2, 521-552

Abstract: I formulate a model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. I characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations. I also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations.

Date: 2011
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https://doi.org/10.1111/j.1538-4616.2011.00450.x

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Journal Article: Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy (2011)
Working Paper: Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:43:y:2011:i:s2:p:521-552

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