The Liquidity Premium of Near-Money Assets

50 Pages Posted: 30 Jun 2014

See all articles by Stefan Nagel

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: June 2014


Treasury bills and other near-money assets provide owners with liquidity service benefits that are reflected in prices in the form of a liquidity premium. I relate time variation in this liquidity premium to changes in the opportunity cost of money: The liquidity service benefits of near-money assets are more valuable when short-term interest rates are high and hence the opportunity cost of holding money is high. Consistent with this prediction, the liquidity premium of T-bills and other near-money assets is strongly positively correlated with the level of short-term interest rates. Once short-term interest rates are controlled for, Treasury security supply variables lose their explanatory power for the liquidity premium. I argue that an analysis of scarcity and price of near-money assets is incomplete without taking into account the substitution relationship with money and its supply by the central bank. Payment of interest on reserves (IOR) could potentially reduce liquidity premia because IOR reduces the opportunity cost of at least one type of money (reserves). In the UK and Canada, however, the introduction of IOR did not shrink liquidity premia. Apparently, the reduction in banks' opportunity cost of money did not result in a broader fall in the opportunity costs of money for non-bank market participants.

Suggested Citation

Nagel, Stefan, The Liquidity Premium of Near-Money Assets (June 2014). NBER Working Paper No. w20265. Available at SSRN:

Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679

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