PRODUCTION-BASED ASSET PRICING IN MONETARY ECONOMIES WITH TRANSACTIONS COSTS

A general equilibrium asset pricing model for a monetary economy with capital accumulation, production and endogenous financial structure is constructed in which there is a meaningful interaction between moneta ry policy, inflation taxes, investment decisions and private financial arrangements. A differential stochastic liquidity premium applies in equilibrium to consumption and investment purchases. A production vers ion of the capital asset pricing model is constructed. The presence of endogenous financial arrangements is shown to play a key role in expl aining potential distortions in the equilibrium risk premia associated with technological uncertainty. Numerical work indicates (1) that ret urn anomalies are potentially large, and (2) that the model has implic ations for empirical implementations for the partial equilibrium, prod uction-based asset pricing models such as Cochrane (1991, 1996) and Br aun (1993).