Monetary Transaction Costs and the Term Premium
39 Pages Posted: 25 Apr 2013
Date Written: April 2013
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: Suggested Citation