I thank Todd Keister and Gianluca Violante for helpful conversations. Financial support from the C.V. Starr Center for Applied Economics at NYU is gratefully acknowledged.
Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy
Article first published online: 23 SEP 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue Supplement s2, pages 521–552, October 2011
How to Cite
LAGOS, R. (2011), Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy. Journal of Money, Credit and Banking, 43: 521–552. doi: 10.1111/j.1538-4616.2011.00450.x
- Issue published online: 23 SEP 2011
- Article first published online: 23 SEP 2011
- Received December 3, 2003; and accepted in revised form November 17, 2010.
- asset pricing;
I formulate a model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. I characterize a family of optimal monetary policies and find that the resulting equity prices are independent of monetary considerations. I also study a perturbation of the family of optimal policies that targets a positive constant nominal interest rate and find that in this case the real equity return includes a liquidity return that depends on monetary considerations.