The Price of Money: The Reserves Convertibility Premium over the Term Structure

Kjell Nyborg and Jiri Woschitz
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Jiri Woschitz: BI Norwegian Business School

No 24-17, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Central bank money provides utility by serving as means of exchange for virtually all transactions in the economy. Central banks issue reserves (money) to banks in exchange for assets such as government bonds. If additional reserves have value to a bank, an asset’s degree of convertibility into reserves can affect its price. We show the existence of a government bond reserves convertibility premium, which tapers off at longer maturities. The degree of convertibility is priced, but heterogeneously so. Our findings have implications for our understanding of reserves, liquidity premia, the term structure of interest rates, and central bank collateral policy.

Keywords: central bank; reserves; convertibility premium; liquidity premium; term structure; yield curve; collateral policy; haircut (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2024-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-upt
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Related works:
Working Paper: The price of money: The reserves convertibility premium over the term structure (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2417

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