Monetary Transaction Costs and the Term Premium
April 3, 2013
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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.
Subject: Asset prices, Commodities, Liquidity, Monetary base, Short term interest rates
Keywords: risk premium, spot interest rate, WP
Pages:
38
Volume:
2013
DOI:
Issue:
085
Series:
Working Paper No. 2013/085
Stock No:
WPIEA2013085
ISBN:
9781484392331
ISSN:
1018-5941
