Asset Liquidity and Monetary Policy

Seungduck Lee ()
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Seungduck Lee: Department of Economics, Sungkyunkwan University

Annals of Economics and Finance, 2025, vol. 26, issue 1, 443-463

Abstract: We construct a parsimonious monetary search model and conduct empirical tests to examine the role of liquid assets as substitutes for money. The theoretical prediction suggests that nominal interest rates positively influence the market values of liquidity services, i.e., liquidity premia. Higher money holding costs increase the demand for liquid assets and, consequently, their prices. Consistent with this theory, the empirical tests show that short-term interest rates positively affect the liquidity premia of 91-day monetary stabilization bonds and three-year government bonds from 2011 to 2019. Additionally, the standing facility introduced in 2008 had a negative effect on these liquidity premia.

Keywords: Liquidity; Liquidity Premium; Nominal Interest Rate; Government Bond; Monetary Stabilization Bond (search for similar items in EconPapers)
JEL-codes: J21 J30 J31 J60 J62 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2025:v:26:i:1:lee

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