Information, Liquidity, Asset Prices and Monetary Policy, Second Version
AbstractWhat 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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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-040.
Length: 50 pages
Date of creation: 15 Oct 2008
Date of revision: 16 Dec 2010
Money; Asset Pricing; Liquidity;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
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