To match the stylised facts of goods and labour markets, the canonical New Keynesian model augments the optimising neoclassical growth model with nominal and real rigidities. We ask what the implications of this type of model are for asset prices. Using a second-order numerical solution to the...

Under fairly basic rationales, this paper provides a more general microstructure model of price quotation in an order driven market. Specifically, as an extension of Handa and Schwartz (1996), we decompose the equilibrium of the bid-ask spread, which is derived as a function of the weighted...