Information, Liquidity, Asset Prices and Monetary Policy, Second Version

Benjamin Lester, Andrew Postlewaite and Randall Wright

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange - i.e., their liquidity. We analyze the effects of monetary policy on asset markets. Recognizability and liquidity are endogenized by allowing agents to invest in information. There can be multiple equilibria with different transaction patterns. These transaction patterns are not invariant to policy. We show small changes in information that may generate large responses in prices, allocations and welfare. We also discuss issues in international economics, including exchange rates and dollarization.

Keywords: Money; Asset Pricing; Liquidity (search for similar items in EconPapers)
JEL-codes: E4 G12 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2008-10-15, Revised 2010-12-16
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:10-040

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