Monetary Policy and Asset Prices: A Mechanism Design Approach

Tai Wei Hu, Guillaume Rocheteau

Research output: Contribution to journalArticle (Academic Journal)peer-review

11 Citations (Scopus)

Abstract

We investigate the effects of monetary policy on asset prices in economies where assets are traded periodically in bilateral meetings. The trading mechanism is designed to maximize social welfare taking as given the frictions in the environment and monetary policy. We show that asset price "bubbles" emerge in a constrained-efficient monetary equilibrium only if liquidity is abundant and the first-best allocation is implementable. In contrast, if liquidity is scarce, assets are priced at their fundamental value in any constrained-efficient monetary equilibrium, in which case an increase in inflation has no effect on asset prices, but it reduces output and welfare.

Original languageEnglish
Pages (from-to)39-76
Number of pages38
JournalJournal of Money, Credit and Banking
Volume47
Issue numberS2
DOIs
Publication statusPublished - 1 Jun 2015

Keywords

  • Asset prices
  • Liquidity
  • Mechanism design
  • Money
  • Pairwise trades

Fingerprint Dive into the research topics of 'Monetary Policy and Asset Prices: A Mechanism Design Approach'. Together they form a unique fingerprint.

Cite this