'Information, Liquidity, Asset Prices and Monetary Policy', Second Version

51 Pages Posted: 19 Dec 2010

See all articles by Benjamin R. Lester

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: December 16, 2010

Abstract

What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange - i.e., their liquidity. We analyze the effects of monetary policy on asset markets. Recognizability and liquidity are endogenized by allowing agents to invest in information. There can be multiple equilibria with different transaction patterns. These transaction patterns are not invariant to policy. We show small changes in information that may generate large responses in prices, allocations and welfare. We also discuss issues in international economics, including exchange rates and dollarization.

Keywords: Money, Asset Pricing, Liquidity

JEL Classification: G12, E4

Suggested Citation

Lester, Benjamin R. and Postlewaite, Andrew and Wright, Randall D., 'Information, Liquidity, Asset Prices and Monetary Policy', Second Version (December 16, 2010). PIER Working Paper No. 10-040, Available at SSRN: https://ssrn.com/abstract=1727602 or http://dx.doi.org/10.2139/ssrn.1727602

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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