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Tobin's imperfect substitution in optimizing general equilibrium

  • Javier Andrés

    ()

    (Banco de España)

  • J. David López Salido

    ()

    (Banco de España)

  • Edward Nelson

    ()

    (Federal Reserve Bank of St. Louis)

In this paper, we present a dynamic optimizing model that allows explicitly for imperfect substitutability between di erent financial assets. This is specified in a manner which captures Tobin's (1969) view that an expansion of one asset's supply a ects both the yield on that asset and the spread or "risk premium" between returns on that asset and alternative assets. Our estimates of this model on U.S. data confirm that some of the observed deviations of long-term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets. The richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy. Our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities, and so exert an extra e ect on long-term yields and aggregate demand separate from their e ect on the expected path of short-term rates.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/04/Fic/dt0409e.pdf
File Function: First version, May 2004
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0409.

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Length: 38 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:bde:wpaper:0409
Contact details of provider: Web page: http://www.bde.es/
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