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Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets

Athanasios Geromichalos and Lucas Herrenbrueck

Journal of Money, Credit and Banking, 2016, vol. 48, issue 1, 35-79

Abstract: We develop a model where agents can allocate their wealth between a liquid asset, which can be used to purchase consumption goods, and an illiquid asset, which represents a better store of value. Should a consumption opportunity arise, agents may visit a frictional “over‐the‐counter” secondary asset market where they can exchange illiquid for liquid assets. We characterize how monetary policy affects both the issue price and the secondary market price of the asset. We also show that, in contrast to conventional wisdom, search and bargaining frictions in the secondary asset market can improve welfare if inflation is low.

Date: 2016
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Working Paper: Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets (2013) Downloads
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