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Monetary Transaction Costs and the Term Premium

Author/Editor: Raphael A. Espinoza | Dimitrios P. Tsomocos
Authorized for Distribution: April 3, 2013
Electronic Access: Free Full Text (PDF file size is 1,112KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We show that, in a monetary equilibrium, trade and asset prices depend on both the supply of the liquidity by the Central Bank and the liquidity of assets and commodities. As a result, monetary aggregates are informative for the conduct of monetary policy. We also show asset prices are higher in liquidity-constrained states of nature. This generates a term premium even in absence of aggregate uncertainty. These results hold in any monetary economy with heterogeneous agents and short-term liquidity effects, where monetary costs act as transaction costs and the quantity theory of money is verified.
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Series: Working Paper No. 13/85
Subject(s): Monetary policy | Central banks | Liquidity | Asset prices | Interest rate structures | Economic models
    Published:   April 3, 2013        
    ISBN/ISSN:   9781484392331/1018-5941   Format:   Paper
    Stock No:   WPIEA2013085   Pages:   38
    Price:   US$18.00
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