Monetary Policy and Asset Prices: A Mechanism Design Approach

Hu, Tai Wei; Rocheteau, Guillaume

doi:10.1111/jmcb.12214

Cited by 25 publications

(14 citation statements)

References 42 publications

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“…Another difference is that in our model the liquidity premium vanishes for high levels of inflation: when inflation is high, agents carry so little money that even a small supply of the asset can be enough to acquire all the available real balances, and the marginal unit of the asset is only useful as a store of value, which is to say that the asset is priced at fundamental. Hu and Rocheteau () arrive at a similar result in a model where assets compete directly with money as media of exchange, and the trading mechanism in bilateral meetings in the decentralized market is designed to maximize social welfare subject to certain frictions of the environment.…”

Section: Related Literaturementioning

confidence: 85%

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Geromichalos¹,

Herrenbrueck²

2016

Journal of Money, Credit and Banking

108

101

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos andWright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, Gˆarleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax. Terms of use: Documents in Department of EconomicsOne Shields Avenue Davis, CA 95616 (530)752-0741 http://www.econ.ucdavis.edu/working_search.cfm Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets Athanasios GeromichalosUniversity of California -Davis Lucas Herrenbrueck University of California -DavisThis Version: September 2012 PRELIMINARY AND INCOMPLETE -PLEASE DO NOT CIRCULATE ABSTRACT ------------------------------------We revisit a traditional topic in monetary economics: the relationship between asset prices and monetary policy. We study a model in which money helps facilitate trade in decentralized markets, as in Lagos and Wright (2005), and real assets are traded in an over-the-counter (OTC) market, as in Duffie, Gârleanu, and Pedersen (2005). Agents wish to hold liquid portfolios, but liquidity comes at a cost: inflation. The OTC market serves as a secondary asset market, in which agents can rebalance their positions depending on their liquidity needs. Hence, a contribution of our paper is to provide a micro-founded explanation of the assumption that different investors have different valuations for the same asset, which is the key for generating gains from trade in the Duffie et al framework. In equilibrium, assets can be priced higher than their fundamental value because they help agents avoid the inflation tax.Keywords: monetary-search models, liquidity, asset prices, over-the-counter markets Email: ageromich@ucdavis.edu, herrenbrueck@ucdavis.edu.We are grateful to Jonathan Chiu, Miguel Molico, Guillaume Rocheteau, Christo...

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Section: Related Literaturementioning

confidence: 85%

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Geromichalos¹,

Herrenbrueck²

2016

Journal of Money, Credit and Banking

108

101

View full text Add to dashboard Cite

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“…Note that because of quasi-linearity, we may replace the lottery with its expected value d (in terms of the numéraire) which ranges (continuously) from 0 to m. The value function for a buyer holding m units of money is V b ( m) that solves (7). Substituting V b ( m) into the buyer's CM value function, his CM problem can be re-expressed as…”

Section: Main Results: Implementationmentioning

confidence: 99%

“…where is the CM price for money. 7 The di¤erence between (2) and (3) is that in the latter money holdings are restricted to N 0 but agents are allowed to randomize over N 0 .…”

Section: The Modelmentioning

confidence: 99%

“…Suppose there is a …xed supply, A > 0, of in…nitely-lived Lucas trees, where each Lucas tree pays one unit of numéraire in the CM, as in Geromichalos, Licari, and Suarez-Lledo (2007) and Lagos (2010). The constrained-e¢ cient allocation when assets are divisible is characterized in Hu and Rocheteau (2015). Suppose trees are not portable and the planner is the only entity that can produce claims on the trees that can be authenticated in the DM.…”

Section: Lucas Treesmentioning

confidence: 99%

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Decentralizing constrained-efficient allocations in the Lagos–Wright pure currency economy

Bajaj

Hu²,

Rocheteau

et al. 2017

Journal of Economic Theory

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This paper o¤ers two ways to decentralize the constrained-e¢ cient allocation of the Lagos-Wright (2005) pure currency economy. The …rst way has divisible money, take-it-or-leave-it o¤ers by buyers, and a transfer scheme …nanced by money creation. If agents are su¢ ciently patient, the …rst best is achieved for …nite money growth rates. If agents are impatient, the equilibrium allocation approaches the constrained-e¢ cient allocation asymptotically as the money growth rate tends to in…nity. The second way has indivisible money, take-it-or-leave-it o¤ers by buyers, and no government intervention. We discuss the strict implementation of constrained-e¢ cient allocations and the applicability of our scheme to economies with Lucas trees, endogenous participation, match-speci…c heterogeneity, and sequential competitive markets. JEL Classi…cation: D83

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“…They find that in any stationary monetary equilibrium, capital has a higher rate of return than fiat money. In Hu and Rocheteau (2015), they study the effects of monetary policy on asset prices. Although some research questions are similar to ours, such as which conditions are necessary for first-best allocations to be obtained, our paper differs from this literature in that we do not study coexistence issues, since we restrict attention to cases where a single exchange medium is sufficient.…”

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confidence: 99%

Monetary policy with asset-backed money

Andolfatto

Berentsen

Waller

2016

Journal of Economic Theory

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We study the use of asset-backed money in a neoclassical growth model with illiquid capital. A mechanism is delegated control of productive capital and issues claims against the revenue it earns. These claims constitute a form of asset-backed money. The mechanism determines (i) the number of claims outstanding, (ii) the dividends paid to claim holders, and (iii) the structure of redemption fees. We find that for capital-rich economies, the first-best allocation can be implemented and price stability is optimal. However, for sufficiently capital-poor economies, achieving the first-best allocation requires a strictly positive rate of inflation. In general, the minimum inflation necessary to implement the first-best allocation is decreasing in capital wealth.

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Monetary Policy and Asset Prices: A Mechanism Design Approach

Cited by 25 publications

References 42 publications

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets

Decentralizing constrained-efficient allocations in the Lagos–Wright pure currency economy

Monetary policy with asset-backed money

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