Asset prices, liquidity, and monetary policy in the search theory of money
The author presents a search-based model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. The author characterizes a family of optimal monetary policies and finds that the resulting equity prices are independent of monetary considerations. The author also studies monetary policies that target a constant, but nonzero, nominal interest rate and finds that to the extent that a financial asset is valued as a means to facilitate transactions, the asset's real rate of return will include a liquidity return that depends on monetary considerations. Through this liquidity channel, persistent deviations from an optimal monetary policy can cause the real prices of assets that can be used to relax trading constraints to exhibit persistent deviations from their fundamental values.
Volume (Year): (2010)
Issue (Month): May ()
|Contact details of provider:|| Postal: |
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.stls.frb.org/research/order/pubform.html Email: |
References listed on IDEAS
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.:
- Lagos, Ricardo, 2010.
"Asset prices and liquidity in an exchange economy,"
Journal of Monetary Economics,
Elsevier, vol. 57(8), pages 913-930, November.
- Ricardo Lagos & Randall Wright, 2005.
"A Unified Framework for Monetary Theory and Policy Analysis,"
Journal of Political Economy,
University of Chicago Press, vol. 113(3), pages 463-484, June.
- Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
- Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlrv:y:2010:i:may:p:303-310:n:v.92no.4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If references are entirely missing, you can add them using this form.