Monetary Transaction Costs and the Term Premium

Raphael Espinoza and Dimitrios Tsomocos

No 2013/085, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; spot interest rate; risk premium (search for similar items in EconPapers)
Pages: 38
Date: 2013-04-03
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Citations: View citations in EconPapers (1)

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Chapter: Monetary transaction costs and the term premium (2019)
Journal Article: Monetary transaction costs and the term premium (2015)
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