Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium

54 Pages Posted: 12 May 2004

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

David Lopez-Salido

Board of Governors of the Federal Reserve System

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: March 2004

Abstract

In this Paper, we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets. This is specified in a manner that captures Tobin's (1969) view that an expansion of one asset's supply affects both the yield on that asset and the spread or 'risk premium' between returns on that asset and alternative assets. Our estimates of this model on US data confirm that some of the observed deviations of long-term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets. The richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy. Our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities, and so exert an extra effect on long-term yields and aggregate demand separate from their effect on the expected path of short-term rates.

Keywords: Transmission mechanism, imperfect asset substitution, monetary policy, term structure

JEL Classification: E52, E58

Suggested Citation

Andrés, Javier and Lopez-Salido, David and Nelson, Edward, Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium (March 2004). CEPR Discussion Paper No. 4336. Available at SSRN: https://ssrn.com/abstract=540962

Javier Andrés

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

David Lopez-Salido (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward Nelson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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