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.
We are grateful to our discussant, Gadi Barlevy, for his useful comments and suggestions. Lagos thanks support from the C.V. Starr Center for Applied Economics at NYU. Zhang thanks support from the Centre for Macroeconomics at LSE. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
New York University is my primary employer. In addition, I have occasional consulting or teaching arrangements with a number of other institutions. During the last five years, the following institutions have paid me or given me grants or in-kind support valued cumulatively at more than $10,000.
Bank of Canada
Central Bank of the Republic of Armenia
Federal Reserve Bank of Minneapolis
Journal of Economic Theory (Elsevier)
Universidad Torcuato Di Tella
University College London
University of Minnesota
Ricardo Lagos & Shengxing Zhang, 2019. "A monetary model of bilateral over-the-counter markets," Review of Economic Dynamics, .