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Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium

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Author Info
Andrés, Javier
López-Salido, J David
Nelson, Edward

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Abstract

In this Paper, we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets. This is specified in a manner that captures Tobin’s (1969) view that an expansion of one asset’s supply affects both the yield on that asset and the spread or ‘risk premium’ between returns on that asset and alternative assets. Our estimates of this model on US data confirm that some of the observed deviations of long-term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets. The richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy. Our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities, and so exert an extra effect on long-term yields and aggregate demand separate from their effect on the expected path of short-term rates.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4336.

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Date of creation: Mar 2004
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Handle: RePEc:cpr:ceprdp:4336

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Related research
Keywords: imperfect asset substitution; monetary policy; term structure; transmission mechanism;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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  5. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  6. Canzoneri, Matthew B. & Diba, Behzad T., 2005. "Interest rate rules and price determinacy: The role of transactions services of bonds," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 329-343, March. [Downloadable!] (restricted)
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  13. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
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  17. Tobin, James, 1982. "Money and Finance in the Macroeconomic Process," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 171-204, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Agustín Maravall, 2005. "An application of the Tramo Seats automatic procedure; direct versus indirect adjustment," Banco de España Working Papers 0524, Banco de España. [Downloadable!]
  2. S. Boragan Aruoba & Frank Schorfheide, 2009. "Sticky prices versus monetary frictions: an estimation of policy trade-offs," Working Papers 09-8, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  3. Óscar J. Arce, 2005. "The fiscal theory of the price level: a narrow theory for non-fiat money," Banco de España Working Papers 0501, Banco de España. [Downloadable!]
  4. Mariano Kulish, 2005. "Should Monetary Policy use Long-term Rates?," Boston College Working Papers in Economics 635, Boston College Department of Economics. [Downloadable!]
  5. Juan J. Dolado & Marcel Jansen & Juan F. Jimeno, 2005. "Dual employment protection legislation: a framework for analysis," Banco de España Working Papers 0510, Banco de España. [Downloadable!]
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  6. Frank Schorfheide, 2008. "DSGE model-based estimation of the new Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 397-433. [Downloadable!]
  7. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Do decreasing hazard functions for price changes make any sense?," Banco de España Working Papers 0508, Banco de España. [Downloadable!]
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  8. Ángel de la Fuente & Juan F. Jimeno, 2005. "The private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU," Banco de España Working Papers 0509, Banco de España. [Downloadable!]
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  9. Kenneth Kuttner, 2006. "Can Central Banks Target Bond Prices?," NBER Working Papers 12454, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Zagaglia, Paolo, 2009. "Forecasting with a DSGE Model of the term Structure of Interest Rates: The Role of the Feedback," Research Papers in Economics 2009:14, Stockholm University, Department of Economics. [Downloadable!]
  11. Peter N. Ireland, 2005. "The monetary transmission mechanism," Working Papers 06-1, Federal Reserve Bank of Boston. [Downloadable!]
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  12. Clerc, L., 2007. "Understanding Asset Prices: Determinants and Policy Implications," Documents de Travail 168, Banque de France. [Downloadable!]
  13. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Price setting behaviour in Spain: evidence from micro PPI data," Banco de España Working Papers 0527, Banco de España. [Downloadable!]
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  14. Ana del Río & Garry Young, 2005. "The determinants of unsecured borrowing: evidence from the British household panel survey," Banco de España Working Papers 0511, Banco de España. [Downloadable!]
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  15. Takeshi Kimura & David Small, 2004. "Quantitative monetary easing and risk in financial asset markets," Finance and Economics Discussion Series 2004-57, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  16. Jesús Vázquez, 2006. "The Importance of Stock Market Returns in Estimated Monetary Policy Rules," DFAEII Working Papers 200606, University of the Basque Country - Department of Foundations of Economic Analysis II, revised 08 Apr 2008. [Downloadable!]
  17. Ana del Río & Garry Young, 2005. "The impact of unsecured debt on financial distress among British households," Banco de España Working Papers 0512, Banco de España. [Downloadable!]
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