Liquidity and Asset Prices
AbstractWe show in an exchange economy with liquidity constraints that the volume of trade and asset prices depend on both the supply of liquidity by the Central Bank and on the liquidity of assets and commodities. As a result, monetary aggregates are informative for the assessment of economic developments and the conduct of monetary policy. We also show that the positive correlation between state prices and the future spot rate generates a risk-premium in the term structure of interest rates, even in absence of aggregate uncertainty. These results do not obtain in representative agent models but hold in any monetary economy with heterogeneous agents and short-term liquidity effects, where monetary costs act as transaction costs and the quantity theory of money is verified.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe28.
Date of creation: 2008
Date of revision:
liquidity; cash-in-advance constraints; term structure of interest rates;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-20 (All new papers)
- NEP-CBA-2008-07-20 (Central Banking)
- NEP-DGE-2008-07-20 (Dynamic General Equilibrium)
- NEP-MAC-2008-07-20 (Macroeconomics)
- NEP-MON-2008-07-20 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Charles A. E. Goodhart & Dimitrios P. Tsomocos, 2011. "The Role of Default in Macroeconomics," IMES Discussion Paper Series 11-E-23, Institute for Monetary and Economic Studies, Bank of Japan.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett).
If references are entirely missing, you can add them using this form.