A Monetary Model of Bilateral Over-the-Counter Markets
44 Pages Posted: 12 Nov 2018 Last revised: 19 Jun 2022
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.
Suggested Citation: 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
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