dynamic inefficiency in decentralized capital markets abstract we study the efficiency implications of bargaining in frictional capital markets in which firms match bilaterally with dealers in order to buy or sell capital we show how two of the distinguishing characteristics of capital ownership and the intertemporal nature of investment give rise to a dynamic inefficiency firms that anticipate buying capital in the future overinvest because this increases their outside option of no trade in negotiations with dealers in the future thereby lowering the bargained purchase price vice versa firms that anticipate selling capital in the future strategically underinvest because this increases the bargained sale price if the only motive for trade is capital depreciation there is overinvestment with stochastic productivity high productivity firms underinvest and low productivity firms overinvest in equilibrium the inefficiency interacts with the externality from dealer entry and implies that no bargaining power achieves the constrained efficient allocation we propose a regressive tax on capital that can restore efficiency finally we calibrate the model to data on physical capital markets and show that depending on bargaining power the welfare loss from the inefficiency can be large

excess liquidity and the foreign currency constraint the case of monetary management in guyana this article examines why commercial banks in guyana demand nonremunerated excess reserves a phenomenon that became even more widespread after financial liberalization despite the removal of capital controls banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves the findings suggest that commercial banks do not demand excess reserves for precautionary purpose which is the conclusion of several other studies but rather because of the maintained constraint the estimated sterilization coefficient is consistent with the hypothesis of an enforced constraint the results moreover suggest an alternative way of looking at the monetary transmission mechanism in developing countries the central bank maintains price and exchange rate stability through the accumulation of foreign reserves

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

intra firm bargaining under non binding contracts we present a new methodology for studying the problem of intra firm bargaining based on the notion that contracts cannot commit the firm and its agents to wages and employment we develop and analyse a general non cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party equilibrium firm profits are characterizable as both a weighted average of a neo classical non bargaining firm s profits and a generalization of shapley value for a corresponding cooperative game furthermore the resulting payoffs induce economically significant distortions in the firm s input and organizational design decisions

precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

external shocks financial volatility and reserve requirements in an open economy abstract the performance of a simple countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions imperfect capital mobility a managed float regime and sterilized foreign exchange market intervention bank funding sources domestic and foreign are imperfect substitutes the model is calibrated and used to study the effects of a temporary drop in the world risk free interest rate consistent with stylized facts the shock triggers an expansion in domestic credit and activity asset price pressures and a real appreciation an optimal credit based reserve requirement rule based on minimizing a composite loss function helps to mitigate both macroeconomic and financial volatility with the latter defined both in terms of a narrow measure based on the credit to output ratio the ratio of capital flows to output and interest rate spreads and a broader measure that includes real asset prices as well greater reliance on sterilization implies a less aggressive optimal reserve requirements rule implying that the two instruments are partial substitutes

competing for order flow in otc markets we develop a model of a two sided asset market in which trades are intermediated by dealers and are bilateral dealers compete to attract order flow by posting the terms at which they execute trades which can include prices quantities and execution times and investors direct their orders toward dealers that offer the most attractive terms of trade equilibrium outcomes have the following properties first investors face a trade off between trading costs and speeds of execution second the asset market is endogenously segmented in the sense that investors with different asset valuations and different asset holdings will trade at different speeds and different costs for example under a leontief technology to match investors and dealers per unit trading costs decrease with the size of the trade in accordance with the evidence from the market for corporate bonds third dealers implicit bargaining powers are endogenous and typically vary across sub markets finally we obtain a rich set of comparative statics both analytically by studying a limiting economy where trading frictions are small and numerically for instance we find that the relationship between trading costs and dealers bargaining power can be hump shaped

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

coexistence of money and interest bearing securities abstract a random matching model with money is used to study the nominal yield on small denomination bearer safe discount securities issued by the government there is always one steady state with matured securities circulating at par and for some parameters another with them circulating at a discount in the former a necessary and sufficient condition for a positive nominal yield on not yet matured securities is exogenous discriminatory treatment of them by the government in the latter the post maturity discount on securities induces a deeper pre maturity discount even without such discriminatory treatment

political violence and excess liquidity in egypt in this article we estimate a time series model of excess liquidity in the egyptian banking sector while financial liberalisation and financial stability are found to have reduced excess liquidity these effects have been offset by an increase in the number of violent political incidents arising from conflict between radical islamic groups and the egyptian state the link between political events and financial outcomes provides a rationale for economic policy interventions by the international community in response to increases in political instability

holdups and overinvestment in capital markets abstract this paper considers a decentralized capital market characterized by trading frictions in which firms and suppliers need to make investment decisions before meeting with each other and bargaining over the price of capital the resulting holdup problem provides firms with a strategic incentive to overaccumulate capital so as to reduce their marginal productivity and thus the bargained price in equilibrium this strategic incentive can outweigh the usual distortionary effects of holdup problems that on their own would lead to underinvestment thus resulting in the economy to overinvest in a setting with both capital and labor the holdup problem in capital markets interacts with holdup problems in labor markets this presents firms with a trade off that has non trivial equilibrium effects and that depending on the substitutability of capital and labor and the firm s bargaining power in each market can mitigate or exacerbate the overinvestment result

loan loss provisioning rules procyclicality and financial volatility interactions between loan loss provisioning regimes and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections with a specific provisioning system provisions are triggered by past due payments with a dynamic system both past due payments and expected losses over the whole business cycle are accounted for and provisions are smoothed over the cycle numerical experiments with a parameterized version of the model show that a dynamic provisioning regime can be highly effective in mitigating procyclicality of the financial system the results also indicate that the combination of a credit gap augmented taylor rule and a dynamic provisioning system with full smoothing may be the most effective way to mitigate real and financial volatility associated with financial shocks

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

capital reallocation and liquidity this paper studies the cyclical properties of capital reallocation and the frictions which inhibit such reallocation we show that the amount of capital reallocation and the benefits to reallocation vary at the business cycle frequency the amount of capital reallocation is procyclical in contrast the benefits to capital reallocation appear countercyclical we measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross sectional dispersion of the productivity of capital we then study a calibrated model of an economy where capital reallocation is costly and impute the cost of reallocation which is consistent with the amount of and benefits to reallocation in the data we find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion the cyclical variation in this cost is interpreted as variation in the liquidity of capital broadly defined since physical costs are unlikely to vary countercyclically

a theory of wages and labor demand with intra firm bargaining and matching frictions this article provides a model of labor market equilibrium with search and within firm strategic bargaining we yield explicit closed form solutions with heterogeneous labor inputs and capital the solution exhibits overemployment we show that higher relative bargaining power for some groups of workers may lead to overemployment relative to other groups with such other groups being underemployed instead if they have a lower relative bargaining power similarly the hold up problem between capitalists and employees does not necessarily lead to underinvestment in physical capital beyond the neo classical analysis firms are the field of several strategic interactions between capital owners and labor between marginal employees and incumbents and more generally between different groups with various bargaining positions within the firm it is usually considered that the bargaining power of workers entails an employment level that is lower than in a competitive labor market and any increase in the bargaining power of workers raises unemployment these results are true for a wide class of models and notably in the now standard framework to analyze unemployment namely search and matching models of pissarides 2000 however stole and zwiebel 1996a 1996b show that the above results are totally changed in the intra firm bargaining model where employees engage in individual wage negotiation with the firm in fact under the assumption that contract incompleteness does not enable either party to commit to future wages and employment decisions they show that intra firm bargaining yields no rent for employees and gives rise to overemployment compared to a competitive labor market the basic idea of stole and zwiebel is that a firm with a diminishing marginal productivity of labor can decrease the bargained wage which increases in the marginal productivity of labor by raising employment in stole and zwiebel s setting firms overemploy strategically up to the point where workers get their reservation wage

the role of bank capital in the propagation of shocks abstract the recent financial turmoil has underlined the importance of analyzing the link between banks balance sheets and economic activity we develop a dynamic stochastic general equilibrium model in which bank capital mitigates an agency problem between banks and their creditors as a result the capital position of banks affects their ability to attract loanable funds and therefore influences the business cycle through a bank capital channel of transmission we find that the bank capital channel greatly amplifies and propagates the effects of technology shocks on output investment and inflation moreover bank capital shocks create sizeable declines in output and investment

gross credit flows the paper estimates gross credit flows for the u s banking system between 1979 and 1999 and shows that sizable gross flows coexist at any phase of the cycle even within narrowly defined loan categories bank size categories and regional units to investigate the macroeconomic dimensions of gross credit flows the paper studies the cyclical behavior of aggregate credit flows and documents three key cyclical facts first excess credit reallocation is countercyclical for any given rate of change of net credit gross flows are larger in a recession than in a boom second gross credit flows are highly volatile with a cyclical volatility which appears more than an order of magnitude larger than gdp volatility third credit contraction is more volatile than credit expansion furthermore the behavior of gross flows over the 1991 recession suggests that persistent and historically high credit contraction is a key feature of the relatively mild cyclical downturn the results lends some support to aggregate models that emphasize the asymmetric behavior of credit expansion and credit contractions

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

are reserve requirements relevant for economic stabilization abstract the level of the required reserve ratio and the payment of interest on required reserves are irrelevant for economic stability 1 when the central bank appropriately adjusts its interest elasticity of supply of reserves or currency to offset changes in the required reserve ratio or in the interest rate paid on required reserves or 2 when economic agents form their price level expectations rationally conditional on the current interest rate

excess liquidity bank pricing rules and monetary policy abstract this paper studies the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections the demand for excess reserves is determined by precautionary factors and the opportunity cost of holding cash it is argued that excess liquidity may impart greater stickiness to the deposit rate in response to a monetary contraction and induce an easing of collateral requirements on borrowers which in turn may translate into a lower risk premium and lower lending rates as a result asymmetric bank pricing behavior under excess liquidity may hamper the ability of a contractionary monetary policy to lower inflation

return on commodity money small change problems and fiat money we construct a search theoretic model of commodity money where a penny is an indivisible silver coin that can be either melted into a silver bar yielding a positive return or used as a medium of exchange in equilibria where the rate of return on silver is sufficiently high small change problems arise in the form of too much trade inefficiency because of a too high value of a penny and no trade inefficiency because of a shortage of coins in circulation in the fiat money system however trades are not affected at all by the rate of return on silver and the value of a penny is determined by its medium of exchange role without incurring the loss in efficiency due to small change problems

trade dynamics in the market for federal funds we develop a model of the market for federal funds that explicitly accounts for its two distinctive features banks have to search for a suitable counterparty and once they have met both parties negotiate the size of the loan and the repayment the theory is used to answer a number of positive and normative questions what are the determinants of the fed funds rate how does the market reallocate funds is the market able to achieve an efficient reallocation of funds we also use the model for theoretical and quantitative analyses of policy issues facing modern central banks

a model of a currency shortage abstract until the mid 19th century shortages of currency were common moreover a frequent policy response was a prohibition on the export of coins we use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins the model although extreme in many regards represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible it can also rationalize a prohibition on the export of money

holdups and efficiency with search frictions a natural holdup problem arises in a market with search frictions firms have to make a range of investments before finding their employees and larger investments translate into higher wages in particular when wages are determined by ex post bargaining the equilibrium is always inefficient recognizing that capital intensive production relations have to pay higher wages firms reduce their investments this can only be prevented by removing all the bargaining power from the workers but this in turn depresses wages below their social product and creates excessive entry of firms in contrast to this benchmark we show that efficiency is achieved when firms post wages and workers can direct their search toward more attractive offers this efficiency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage offers we show that the underlying reason for efficiency is not wage posting per se but the ability of workers to direct their search toward more capital intensive jobs

decentralized international exchange traditional models of international trade take place within trading environments in which trade is coordinated by a walrasian auctioneer who instantly matches buyers and sellers in world markets this assertion seems inconsistent with evidence suggesting that trading arrangements seem to economize on transactions costs associated with international trade recognizing these insights we depart from standard models of international trade by incorporating the difficulties in the coordination of exchange within a two country random matching model of international trade we capture a motivation for trade through comparative advantage and interpret trade across economies to be associated with an agent s endogenous choice to participate in foreign markets although an individual may decide to search abroad to obtain additional gains from trade resulting from comparative advantage she is less likely to meet trading partners abroad as search frictions are higher in the foreign country than in the domestic market using this framework we show that international trade is associated with convergence in relative prices across countries we also show that the extent of market frictions in the foreign country affects relative prices the volume of international trade and welfare levels due to market participation externalities associated with international trade we show that a movement from autarky to free trade may actually lower welfare levels we conclude by examining the possible inefficiencies associated with international trade due to the decentralized nature of exchange and the policy implications of our model

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

reserve requirements and economic stability reserve requirements have become a common institutional feature of our monetary systems they are widely held to be indispensable for zfficient control of the financial sector of the economy yet relatively little analysis has been directed at the question of what constitutes an optimal level and structure of reserve requirements in the traditional literature the major exceptions concetn some discussions of the extreme values of 100 percent or zero requirements especially the former see e g 1 5 6 7 10 for a zero required reserve proposal see 3 in recent years some newer studies dealing with these issues have appeared see e g 8 9 11 12 15 in all of these studies the focus is almost exclusively on money stock control generally speaking their results support the 100 percent reserves idea though such a scheme is usually seen as infeasible for political or institutional reasons leading to recommendations to set requirements as high as possible against deposits included in the money stock subject to whatever constraints of this nature are perceived the underlying idea of course is that this minimizes the influence of private sector disturbances on the money stock by lowering the money multiplier and making it equal to one in the extreme case of a 100 percent requirement reserve requirements are comparable to a tax on a particular economic activity namely the production of deposit accounts as such they have efficiency effects similar to those of a tax on other types of activities although this has always been

search in asset markets market structure liquidity and welfare this paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market to this end we generalize the search theoretic model of financial intermediation of darrell duffie et al 2005 to allow for entry of dealers and unrestricted asset holdings

excess reserves monetary policy and financial volatility abstract this paper examines the real and financial effects of reserves in a dynamic stochastic general equilibrium dsge model with monopoly banking and credit market imperfections the framework explicitly accounts for the fact that commercial banks hold excess reserves and they incur costs in holding these assets the model also accounts for imperfect substitutability between bank funding sources and it shows that this feature is an important channel through which reserve requirement shocks can affect real variables numerical experiments show that an increase in reserve requirements creates a countercyclical effect for real economic activity the results also indicate that the combination of an augmented taylor rule which responds to excess reserves and a countercyclical reserve requirement rule is optimal to mitigate macroeconomic and financial volatility associated with liquidity shocks

towards a new inflation targeting framework the case of uruguay proquest denotes formulae omitted empirical studies in the late 1980s suggesting that monetary policy might influence the short run dynamics of the real economy contributed to the widespread use of inflation targeting policy rules by central banks more recent research on monetary economics provide a theoretical framework for the implementation of such rules for example taylor 1993 recommends the use of a simple interest rate rule that is a function of inflation and the out put gap nowadays it is standard to use the dynamic stochastic general equi librium dsge model and new keynesian models to evaluate the effects of federal reserve policies the success of alternative policy rules is usually assessed in terms of the short run dynamics of the relevant macroeconomic variables many central banks use the reference interest rate as a conventional instru ment to signal to the public changes in the monetary policy stance in this way they attempt to achieve the convergence of inflation and its expectation upon a given target recently several central banks in latin american countries lac adopted stabilization policies using conventional and unconventional tools to meet their inflationary or financial stability objectives among the unconventional tools are reserve requirements see glocker and towbin 2012 and the references there for several emerging countries outside latin america for lacs see carvalho and acevedo 2008 ocampo and tovar 2003 ribeira and barbosa 2005 vargas and others 2010 in highly dollarized lac changes in reserve requirements have been used as a macroeconomic pruden tial tool with the main objective of accumulating liquidity being to address financial stress see leon and quispe 2010 vargas and cardozo 2012 tovar garcia escribano and vera martin 2012 carrera and vega 2012 and to complement the use of the reference interest rate in order to achieve the infla tion target objective see comunicados del copom 2007 12 for uruguay glocker and towbin 2012 however most of the literature on the use of reserve requirements in lac is not only empirical but is mostly focused on the impact of these requirements on interest spreads and bank profits the main conclusion from those studies is that an increase in reserve requirements induces an increment in interest rate spreads and a fall in bank profits an increment in reserve requirements acts as a tax on the banks and widens the spread between lending and deposit rates see glocker and towbin 2012 monetary policy shocks typically generate a short run fall in inflation through a contractionary effect on economic activity furthermore in highly dollarized economies these shocks may also have undesirable effects on the foreign exchange market montoro and moreno 2011 therefore the use of reserve requirements may be an important unconventional monetary policy tool since it could help to achieve the inflationary target without having major effects on the exchange rate market that is without attracting capital inflows and it may also reduce the negative impact of the increase in interest rates on output nevertheless the short run effects of this type of policy are not obvious since it depends on among other things the combination of instruments cho sen to achieve the target and the type of target under consideration the main objective of this paper is to describe the impact of using conventional and unconventional tools to meet inflationary or financial stability objectives in a dollarized economy this paper explores for the uruguayan economy the impact of these policies using a relatively standard model of a small open economy with sticky prices financial frictions and a banking sector that is subject to legal reserve requirements 1the three main findings of the paper are as follows one reserve require ments can be used to achieve the inflationary objectives of the central bank

leaning against the wind during financial disruptions market makers provide liquidity by absorbing external selling pressure they buy when the pressure is large accumulate inventories and sell when the pressure alleviates this paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure and order execution delays i show that competitive market makers offer the socially optimal amount of liquidity provided they have access to sufficient capital if raising capital is costly this suggests a policy role for lenient central bank lending during financial disruptions

modeling small change a review article abstract in the big problem of small change sargent and velde apply a cash in advance model to the history of coinage and to contemporary thought about coinage they assert that their model accounts for puzzling observations involving the depreciation and disappearance of small coins i question its usefulness for that purpose and for other issues pertaining to coinage my main concern is that their model does not depict the problems usually associated with full bodied coinage systems problems that stem from the technological difficulties of having a full bodied coinage system in which money is portable divisible durable and recognizable

trade using assets divisible at a cost abstract the consequences of costly divisibility of assets are studied using a model with the following features the demand for assets is generated from an overlapping generations model with a continuum of agents in each generation and with intrageneration trade intermediation ruled out there is a once for all supply of a stock of nonnegative dividend assets in a large size and there is a costly technology for dividing them into smaller sizes stationary equilibria are shown to exist in contrast with similar models with costless divisibility of assets competitive equilibria are not necessarily desirable there can be pareto ordered equilibria

price discovery in illiquid markets do financial asset prices rise faster than they fall we study price discovery in municipal bonds an important otc market as in markets for consumer goods prices rise faster than they fall round trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets further effective half spreads increase or decrease more when movements in fundamentals favor dealers yield spreads relative to treasuries also adjust with asymmetric speed in rising and falling markets finally intraday price dispersion is asymmetric in rising and falling markets as consumer search theory would predict in a wide variety of consumer markets prices for retail goods rise faster than they fall 1 this asymmetric price adjustment referred to as rockets and feathers is generally understood by economists to be inconsistent with perfect competition between sellers sellers appear to exploit local market power due to the search frictions that their customers face we document asymmetric price adjustment in a major over the counter otc financial market using a comprehensive sample of all trades in municipal bonds over a 5 year period we provide evidence that the asymmetric price adjustment is associated with opportunistic timing by the broker dealers who intermediate trades in the market movements in fundamentals that increase spreads earned by broker dealers are reflected quickly in prices while prices respond more slowly to changes that reduce their spreads further the asymmetries are more pronounced in states where tax treatment of the bonds would induce market segmentation we also document asymmetries in withinday price dispersion as implied by theoretical models of rockets and feathers price adjustments based on costly consumer search and learning