A monetary model of bilateral over-the-counter markets

Ricardo Lagos, Shengxing Zhang

    Research output: Contribution to journalArticle

    Abstract

    We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and the market microstructure where it is traded. These liquidity considerations imply a positive correlation between the real yield on such assets as stocks and housing and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous. We provide novel theoretical implications and empirical evidence regarding the effect of monetary policy on the liquidity of these markets.

    Original languageEnglish (US)
    JournalReview of Economic Dynamics
    DOIs
    StatePublished - Jan 1 2019

    Fingerprint

    Bilateral
    Monetary policy
    Liquidity
    Asset prices
    Assets
    Premium
    Market microstructure
    Empirical evidence
    Marketability

    Keywords

    • Asset prices
    • Fed model
    • Liquidity
    • Money
    • OTC markets

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    A monetary model of bilateral over-the-counter markets. / Lagos, Ricardo; Zhang, Shengxing.

    In: Review of Economic Dynamics, 01.01.2019.

    Research output: Contribution to journalArticle

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