Asset prices, liquidity, and monetary policy in an exchange economy

Ricardo Lagos

    Research output: Contribution to journalArticlepeer-review

    Abstract

    I formulate a model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. I characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations. I also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations.

    Original languageEnglish (US)
    Pages (from-to)521-552
    Number of pages32
    JournalJournal of Money, Credit and Banking
    Volume43
    Issue numberSUPPL. 2
    DOIs
    StatePublished - Oct 2011

    Keywords

    • Asset pricing
    • Liquidity
    • Money
    • Search

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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