Working Paper: NBER ID: w25239
Authors: Ricardo Lagos; Shengxing Zhang
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.
Keywords: monetary exchange; bilateral OTC markets; monetary policy; asset prices; financial liquidity
JEL Codes: D83; E31; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quantity of money (E41) | asset prices (G19) |
| anticipated inflation (E31) | real balances (F31) |
| real balances (F31) | asset allocation (G11) |
| anticipated inflation (E31) | asset prices (G19) |
| anticipated inflation (E31) | speculative premium (D84) |
| real balances (F31) | purchasing ability of high-valuation traders (D46) |
| monetary policy (E52) | speculative motives (D84) |
| monetary policy (E52) | market liquidity (G10) |
| speculative premium (D84) | asset prices (G19) |
| anticipated inflation (E31) | real asset prices (G19) |