Creator: Lagos, Ricardo and Rocheteau, Guillaume Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 341 Abstract:
We construct a model where capital competes with fiat money as a medium of exchange, and we establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman Rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.
Keyword: Commodity money and Fiat money Subject (JEL): E52 - Monetary Policy, E41 - Demand for Money, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Lagos, Ricardo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 373 Abstract:
I develop an asset-pricing model in which financial assets are valued for their liquidity—the extent to which they are useful in facilitating exchange—as well as for being claims to streams of consumption goods. The implications for average asset returns, the equity-premium puzzle and the risk-free rate puzzle, are explored in a version of the model that nests the work of Mehra and Prescott (1985).
Keyword: Equity Premium, Exchange, Risk-Free Rate, Asset Pricing, and Liquidity Subject (JEL): E52 - Monetary Policy, D42 - Market Structure, Pricing, and Design: Monopoly, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Lagos, Ricardo and Zhang, Shengxing Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 734 Abstract:
We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
Keyword: Asset prices, Monetary policy, Monetary transmission, and Liquidity Subject (JEL): E52 - Monetary Policy, D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates