Premium
Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets
Author(s) -
GEROMICHALOS ATHANASIOS,
HERRENBRUECK LUCAS
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12290
Subject(s) - market liquidity , asset (computer security) , monetary economics , economics , monetary policy , secondary market , consumption (sociology) , inflation (cosmology) , welfare , value (mathematics) , basis risk , capital asset pricing model , microeconomics , business , financial economics , finance , market economy , social science , physics , computer security , machine learning , sociology , theoretical physics , computer science , stock exchange
We develop a model where agents can allocate their wealth between a liquid asset, which can be used to purchase consumption goods, and an illiquid asset, which represents a better store of value. Should a consumption opportunity arise, agents may visit a frictional “over‐the‐counter” secondary asset market where they can exchange illiquid for liquid assets. We characterize how monetary policy affects both the issue price and the secondary market price of the asset. We also show that, in contrast to conventional wisdom, search and bargaining frictions in the secondary asset market can improve welfare if inflation is low.