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 monetary policy, inflation taxes, investment decisions and private financial arrangements. A differential stochastic liquidity premium applies in equilibrium to consumption and investment purchases. A production version of the capital asset pricing model is constructed. The presence of endogenous financial arrangements is shown to play a key role in explaining potential distortions in the equilibrium risk premia associated with technological uncertainty. Numerical work indicates (1) that return anomalies are potentially large, and (2) that the model has implications for empirical implementations for the partial equilibrium, production-based asset pricing models such as Cochrane (1991, 1996) and Braun (1993).