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Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy

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  • RICARDO LAGOS

Abstract

I formulate a search-based asset-pricing model where equity shares and fiat money can be used as means of payment. I characterize a family of optimal stochastic monetary policies. Every policy in this family implements Friedman's prescription of zero nominal interest rates. Under an optimal policy, equity prices and returns are independent of monetary considerations. I also study a perturbation of the family of optimal policies that targets a constant but nonzero nominal interest rate. Under such policies, the average real return on equity is negatively correlated with the average inflation rate.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00450.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): (October)
Pages: 521-552

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i::p:521-552

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Giovannini, Alberto & Labadie, Pamela, 1991. "Asset Prices and Interest Rates in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1215-51, December.
  2. B. Ravikumar & Enchuan Shao, 2010. "Search Frictions and Asset Price Volatility," Working Papers 10-1, Bank of Canada.
  3. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, vol. 142(1), pages 247-258, September.
  4. Boyle, Glenn W & Young, Leslie, 1988. "Asset Prices, Commodity Prices, and Money: A General Equilibrium, Rational Expectations Model," American Economic Review, American Economic Association, vol. 78(1), pages 24-45, March.
  5. Athanasios Geromichalos & Juan M Licari & Jose Suarez-Lledo, 2007. "Monetary Policy and Asset Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 761-779, October.
  6. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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Cited by:
  1. Young Sik Kim & Manjong Lee, 2011. "Intermediary Cost and Coexistence Puzzle," Discussion Paper Series 1103, Institute of Economic Research, Korea University.
  2. Randall Wright & Guillaume Rocheteau, 2011. "Liquidity and Asset Market Dynamics," 2011 Meeting Papers 103, Society for Economic Dynamics.
  3. Venky Venkateswaran & Randall Wright, 2013. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Chapters, in: NBER Macroeconomics Annual 2013, Volume 28, pages 227-270 National Bureau of Economic Research, Inc.
  4. Guillaume Rocheteau & Pierre-Olivier Weill, 2011. "Liquidity in frictional asset markets," Working Paper 1105, Federal Reserve Bank of Cleveland.
  5. Ricardo Lagos, 2008. "The Research Agenda: Ricardo Lagos on Liquidity and the Search Theory of Money," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(1), November.
  6. Hanno Lustig, 2013. "A European History Lesson for Today’s Central Bankers," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 109-120, March.
  7. Afonso, Gara M. & Lagos, Ricardo, 2014. "Trade Dynamics in the Market for Federal Funds," Working Papers 710, Federal Reserve Bank of Minneapolis.
  8. Jacquet, Nicolas L. & Tan, Serene, 2012. "Money and asset prices with uninsurable risks," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 784-797.
  9. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 426-438.
  10. Manjong Lee & Sung Guan Yun, 2014. "Composition of Portfolio and Cost of Inflation," Discussion Paper Series 1403, Institute of Economic Research, Korea University.
  11. Afonso, Gara M. & Lagos, Ricardo, 2014. "The Over-the-Counter Theory of the Fed Funds Market: A Primer," Working Papers 711, Federal Reserve Bank of Minneapolis.

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