  This paper analyzes the role of money in asset markets characterized by
search frictions. We develop a dynamic framework that brings together a model
for illiquid financial assets `a la Duffie, Garleanu, and Pedersen, and a
search-theoretic model of monetary exchange `a la Lagos and Wright. The
presence of decentralized financial markets generates an essential role for
money, which helps investors re-balance their portfolios. We provide conditions
that guarantee the existence of a monetary equilibrium. In this case, asset
prices are always above their fundamental value, and this differential
represents a liquidity premium. We are able to derive an asset pricing theory
that delivers an explicit connection between monetary policy, asset prices, and
welfare. We obtain a negative relationship between inflation and equilibrium
asset prices. This key result stems from the complementarity between money and
assets in our framework.
