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Heterogeneous asset valuation in OTC markets and optimal inflation

Author

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  • Geromichalos, Athanasios
  • Jung, Kuk Mo

Abstract

Building on recent work in monetary theory and finance, we develop a framework where money serves a double liquidity role, namely, it serves as a medium of exchange in goods markets as well as asset markets. We argue that studying such a framework is not only more empirically relevant, but also gives rise to new, important economic insights regarding the effects of inflation on welfare and asset prices. The main result of the paper is that, contrary to conventional wisdom, in our model welfare can be increasing in inflation due to a new channel whereby higher inflation promotes beneficial trade in the secondary asset market.

Suggested Citation

  • Geromichalos, Athanasios & Jung, Kuk Mo, 2024. "Heterogeneous asset valuation in OTC markets and optimal inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:dyncon:v:161:y:2024:i:c:s0165188924000162
    DOI: 10.1016/j.jedc.2024.104824
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    More about this item

    Keywords

    Monetary-search models; Liquidity; Asset prices; Over-the-counter markets; Inflation-welfare relationship;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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