@article{56ae6fd61c51476e91e1202a58a01212,
title = "A monetary model of bilateral over-the-counter markets",
abstract = "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.",
keywords = "Asset prices, Fed model, Liquidity, Money, OTC markets",
author = "Ricardo Lagos and Shengxing Zhang",
note = "Funding Information: We are grateful to our discussant, Gadi Barlevy, and editors of the special issue, Ben Lester, Pierre-Olivier Weill and Ariel Zetlin-Jones for their useful comments and suggestions. Lagos is thankful for the support from the C.V. Starr Center for Applied Economics at NYU , and for the hospitality of Princeton University, University College London, the University of Minnesota, and the Federal Reserve Bank of Minneapolis. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Zhang is thankful for the support from the Centre for Macroeconomics at LSE , the British Academy/Leverhulme Small Research Grant, and the ESRC-NSFC Grant “Building Debt Capital Markets in China.” The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. Publisher Copyright: {\textcopyright} 2019 Elsevier Inc.",
year = "2019",
month = jul,
doi = "10.1016/j.red.2019.01.004",
language = "English (US)",
volume = "33",
pages = "205--227",
journal = "Review of Economic Dynamics",
issn = "1094-2025",
publisher = "Academic Press Inc.",
}