A Monetary Model of Bilateral Over-the-Counter Markets

Abstract

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. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w25239.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

On Speculative Frenzies and Stabilization Policy

“…The explanation this paper o¤ers is that a speculation shock that leads to an asset boom also encourages agents to hoard liquidity, which other things equal would drive the price level down. This is a contrast to models such as Lagos and Zhang (2019) which emphasize the opposite, but mutually compatible, direction of causality in a decision by the monetary authority to lower in ‡ation encourages agents to trade the asset, improving the allocation of the asset and driving up its value.…”

“…The framework I use draws on Rocheteau, Weill, and Wong (2018) and Herrenbrueck (2019). Within this literature, the paper that comes closest to the issues I explore is Lagos and Zhang (2019). They also develop a model with money and a dividend-bearing asset that agents value di¤erently.…”

The Search Theory of OTC Markets

“…While Lucas (1990) assumed a competitive asset market, a recent literature has considered OTC asset markets, with new insights into the impact of monetary policy. Works in this area include , Lagos and Zhang (Forthcoming), Lagos and Zhang (2019a), Zhang (2019b), Geromichalos, Herrenbrueck, andSalyer (2016), Mattesini andNosal (2016), andLebeau (2019).…”