Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets
Athanasios Geromichalos and
No 262, Working Papers from University of California, Davis, Department of Economics
We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos andWright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, G?arleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax.
Keywords: monetary-search models; liquidity; asset prices; over-the-counter markets (search for similar items in EconPapers)
JEL-codes: E31 E50 E52 G12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Journal Article: Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cda:wpaper:262
Access Statistics for this paper
More papers in Working Papers from University of California, Davis, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Letters and Science IT Services Unit ().