Search Results
Working Paper
Liquidity in asset markets with search frictions
We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume and trading delays?all the dimensions ...
Working Paper
Liquidity in asset markets with search frictions
We study how trading frictions in asset markets affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. To this end, we analyze the equilibrium and optimal allocations of a search-theoretic model of financial intermediation similar to Duffie, Grleanu and Pedersen (2005). In contrast with the existing literature, the model we develop imposes no restrictions on asset holdings, so traders can accommodate frictions by varying their trading needs through changes in their asset positions. We find that this is a critical aspect of investor behavior in ...
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Inflation, output and welfare
This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers? search intensities, output ...
Working Paper
Search in asset markets: market structure, liquidity, and welfare
This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. To this end, we generalize the search-theoretic model of financial intermediation of Darrell Duffie et al. (2005) to allow for entry of dealers and unrestricted asset holdings.
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A model of TFP
This paper proposes an aggregative model of Total Factor Productivity (TFP) in the spirit of Houthakker (1955-1956). It considers a frictional labor market where production units are subject to idiosyncratic shocks and jobs are created and destroyed as in Mortensen and Pissarides (1994). An aggregate production function is derived by aggregating across micro production units in equilibrium. The level of TFP is explicitly shown to depend on the underlying distribution of shocks as well as on all the characteristics of the labor market as summarized by the job-destruction decision. The model is ...
Working Paper
Search in asset markets
We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Grleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealers, we show that a steady-state equilibrium exists and is unique, and provide a condition on preferences under which a reduction in trading frictions leads to an increase in the price of the asset. We ...
Working Paper
Dynamics, cycles and sunspot equilibria in \"genuinely dynamic, fundamentally disaggregative\" models of money
This paper pursues a line of Cass and Shell, who advocate monetary models that are "genuinely dynamic and fundamentally disaggregative" and that incorporate "diversity among households and variety among commodities." Recent search-theoretic models fit this description. The authors show that, like overlapping generations models, search models generate interesting dynamic equilibria, including cycles, chaos, and sunspot equilibria. This helps explain how alternative models are related and lends support to the notion that endogenous dynamics and uncertainty matter, perhaps especially in ...
Report
Liquidity in asset markets with search frictions
We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume, and trading delays - all the ...
Report
Asset prices and liquidity in an exchange economy
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).
Working Paper
A unified framework for monetary theory and policy analysis
Search-theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential. However, tractable versions usually have strong assumptions that make them ill suited for discussing some policy questions, especially those concerning changes in the money supply. Hence, most policy analysis uses reduced-form models. The authors propose a framework, designed to help bridge this gap, that is based explicitly on microeconomic frictions, but allows for interesting macroeconomic policy analyses. At the same time, the model is analytically tractable and ...