Monetary Transaction Costs and the Term Premium

39 Pages Posted: 25 Apr 2013

See all articles by Raphael A. Espinoza

Raphael A. Espinoza

International Monetary Fund (IMF)

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Date Written: April 2013

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: Liquidity, Cash-in-advance constraints, Term structure of interest rates

JEL Classification: E43, G12

Suggested Citation

Espinoza, Raphael A. and Tsomocos, Dimitrios P., Monetary Transaction Costs and the Term Premium (April 2013). IMF Working Paper No. 13/85, Available at SSRN: https://ssrn.com/abstract=2256297

Raphael A. Espinoza (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://oxford.academia.edu/RaphaelEspinoza

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

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