A Model of Monetary Exchange in Over-the-Counter Markets
We develop a model of monetary exchange in over-the-counter (OTC) markets and use it to study the effects of inflation on asset prices, as well as on standard measures of financial liquidity, such as the size of bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by choosing to participate in the market-making activity, and by holding asset inventories on their own account.