Events

This paper builds a micro-founded model featuring frictional asset market and frictional capital market, to address the interaction of firms’ activities in these two markets, and the effects of monetary policy on firms’ portfolio choices in asset market and capital accumulation/reallocation in capital market. Analytical results show there are different types of general equilibrium, depending on the cash and asset constraints of firms. Two types of monetary policy are discussed: one is conventional policy, i.e., changing inflation rate; the other is unconventional policy, i.e., asset purchase/sale by the central bank. The latter is only valid when the asset constraint is binding. Quantitative work is used to investigate firms’ investment and capital reallocation during the Great Recession, and general effects of monetary policy, including the exit of unconventional policy.