A monetary model of bilateral over-the-counter markets

We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and...

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Bibliographic Details
Published in:Review of economic dynamics 2019-07, Vol.33, p.205-227
Main Authors: Lagos, Ricardo, Zhang, Shengxing
Format: Article
Language:English
Subjects:
Asset prices
Fed model
Liquidity
Money
OTC markets
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Summary:We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and the market microstructure where it is traded. These liquidity considerations imply a positive correlation between the real yield on such assets as stocks and housing and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous. We provide novel theoretical implications and empirical evidence regarding the effect of monetary policy on the liquidity of these markets.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2019.01.004