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Monetary Transaction Costs and the Term Premium
Author:
Mr. Raphael A Espinoza
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Mr. Dimitrios P. Tsomocos null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 085
Language:
English
Publication Date:
03 Apr 2013
DOI:
https://doi.org/10.5089/9781484392331.001
ISBN:
9781484392331
ISSN:
1018-5941
Pages:
38
Keywords:
WP; spot interest rate; risk premium
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund