A Monetary Model of Bilateral Over-the-Counter Markets
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 stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous.
Published Versions
Ricardo Lagos & Shengxing Zhang, 2019. "A monetary model of bilateral over-the-counter markets," Review of Economic Dynamics, .
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