A Monetary Model of Bilateral Over-the-Counter Markets

44 Pages Posted: 12 Nov 2018

See all articles by Ricardo Lagos

Ricardo Lagos

New York University (NYU) - Department of Economics

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Date Written: November 2018

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 stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous.

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Suggested Citation

Lagos, Ricardo and Zhang, Shengxing, A Monetary Model of Bilateral Over-the-Counter Markets (November 2018). NBER Working Paper No. w25239. Available at SSRN: https://ssrn.com/abstract=3282903

Ricardo Lagos (Contact Author)

New York University (NYU) - Department of Economics ( email )

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Shengxing Zhang

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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