Monetary policy, asset prices, and liquidity in over-the-counter markets

Arbeitspapier

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, Gˆarleanu, 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 12-20

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Monetary Policy ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: monetary-search models ; liquidity ; asset prices ; over-the-counter markets

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Geromichalos, Athanasios ; Herrenbrueck, Lucas
• Event: Veröffentlichung
• (who): University of California, Department of Economics
• (where): Davis, CA
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/79684
• Last update: 10.03.2025, 11:44 AM CET