Money and finance in dynamic models with search for informational frictions

Abstract

The presence of severe search frictions undermines technological development since the long waiting period for the subsequent trade would discourage the selectiveness of product qualities. The introduction of money will alleviate search frictions, and hence improve the technology choice. A new asset pricing formula is proposed for an economy with heterogeneous prior beliefs. It helps explain why stock prices may deviate from the expected fundamental values, and how speculators can make profits from stock price manipulations provided the presence of informational frictions. An empirical wavelet analysis of stock market comovements reveals some features of the informational spillovers from NASDAQ and S&P500 to some Eastern Asian markets.