A monetary model of bilateral over-the-counter markets

Ricardo Lagos, Shengxing Zhang

    Research output: Contribution to journalArticlepeer-review

    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.

    Original languageEnglish (US)
    Pages (from-to)205-227
    Number of pages23
    JournalReview of Economic Dynamics
    Volume33
    DOIs
    StatePublished - Jul 2019

    Keywords

    • Asset prices
    • Fed model
    • Liquidity
    • Money
    • OTC markets

    ASJC Scopus subject areas

    • Economics and Econometrics

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