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Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy

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  • RICARDO LAGOS

Abstract

I formulate a 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. I characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations. I also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations.

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  • Ricardo Lagos, 2011. "Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 521-552, October.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:s2:p:521-552
    DOI: 10.1111/j.1538-4616.2011.00450.x
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