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Information, Liquidity, Asset Prices and Monetary Policy, Second Version

Author

Listed:
  • Benjamin Lester

    () (Department of Economics, University of Western Ontario)

  • Andrew Postlewaite

    () (Department of Economics, University of Pennsylvania)

  • Randall Wright

    () (Federal Reserve Bank of Minneapolis and University of Wisconsin School of Business)

Abstract

What 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.

Suggested Citation

  • Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity, Asset Prices and Monetary Policy, Second Version," PIER Working Paper Archive 10-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 16 Dec 2010.
  • Handle: RePEc:pen:papers:10-040
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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/10-040.pdf
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    More about this item

    Keywords

    Money; Asset Pricing; Liquidity;

    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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