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Information, Liquidity, Asset Prices and Monetary Policy, Second Version

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Author Info

  • Benjamin Lester

    ()
    (Department of Economics, University of Western Ontario)

  • Andrew Postlewaite

    ()
    (Department of Economics, University of Pennsylvania)

  • Randall Wright

    ()
    (Federal Reserve Bank of Minneapolis and University of Wisconsin School of Business)

Abstract

What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange - i.e., their liquidity. We analyze the effects of monetary policy on asset markets. Recognizability and liquidity are endogenized by allowing agents to invest in information. There can be multiple equilibria with different transaction patterns. These transaction patterns are not invariant to policy. We show small changes in information that may generate large responses in prices, allocations and welfare. We also discuss issues in international economics, including exchange rates and dollarization.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/10-040.pdf
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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-040.

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Length: 50 pages
Date of creation: 15 Oct 2008
Date of revision: 16 Dec 2010
Handle: RePEc:pen:papers:10-040

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Keywords: Money; Asset Pricing; Liquidity;

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