Template-Type: ReDIF-Paper 1.0
Author-Name: Athanasios Geromichalos
Author-Name-First: Athanasios
Author-Name-Last: Geromichalos
Author-Name: Lucas Herrenbrueck
Author-Name-First: Lucas
Author-Name-Last: Herrenbrueck
Author-Workplace-Name: Department of Economics, University of California Davis
Title: Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets
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.
Length: 41
File-URL: https://repec.dss.ucdavis.edu/files/9GEFa47nGTVBWK8zEM9vH9B4/12-20.pdf
File-Format: application/pdf
Number: 262
Classification-JEL: E31, E50, E52, G12
KeyWords: monetary-search models, liquidity, asset prices, over-the-counter markets
Creation-Date: 20130617
Handle: RePEc:cda:wpaper:262