Over-the-Counter Markets, Intermediation, and Monetary Policy

Han Han

MPRA Paper from University Library of Munich, Germany

Abstract: During the Great Recession, the Federal Reserve implemented two monetary policies: cutting interest rates and quantitative easing (QE). I develop a model to examine these two policies in a frictional financial environment. In this model, agents sell assets to acquire money when a consumption opportunity arises, which can only be done through over-the-counter (OTC) markets. In equilibrium, when the interest rate is low (not necessarily zero), households who trade in OTC markets achieve their optimal consumption. When the interest rate is high, QE will raise asset prices and lower households’ consumption. The asset price increase indicates a higher liquidity premium, which reflects inefficiency in money reallocation.

Keywords: OTC markets; Middlemen; Monetary Policy; QE; Asset Pricing (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G12 (search for similar items in EconPapers)
Date: 2015-12-18
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68709

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