Journal Article

Information, Liquidity, Asset Prices, and Monetary Policy

Benjamin Lester, Andrew Postlewaite and Randall Wright

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 3, pages 1209-1238
Published in print July 2012 | ISSN: 0034-6527
Published online January 2012 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rds003
Information, Liquidity, Asset Prices, and Monetary Policy

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What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange—i.e. it determines their liquidity. Recognizability and liquidity are endogenized by allowing agents to invest in information. We analyse the effects of monetary policy. There can be multiple equilibria, with different transaction patterns, and these patterns are not invariant to policy. We show that small changes in information may generate large responses in asset prices, allocations, and welfare. We also discuss some issues in international economics, including exchange rates and dollarization.

Keywords: Information; Liquidity; Asset prices; Monetary policy; E40; E50; G11; G12

Journal Article.  16216 words.  Illustrated.

Subjects: Economics ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; Money and Interest Rates

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