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

Athanasios Geromichalos and Lucas Herrenbrueck

No 262, Working Papers from University of California, Davis, Department of Economics

Abstract: 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)
Pages: 41
Date: 2013-06-17
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cda:wpaper:262

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