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Asset Liquidity and Monetary Policy

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  • Seungduck Lee

    (Department of Economics, Sungkyunkwan University)

Abstract

We construct a parsimonious monetary search model and conduct empirical tests to examine the role of liquid assets as substitutes for money. The theoretical prediction suggests that nominal interest rates positively influence the market values of liquidity services, i.e., liquidity premia. Higher money holding costs increase the demand for liquid assets and, consequently, their prices. Consistent with this theory, the empirical tests show that short-term interest rates positively affect the liquidity premia of 91-day monetary stabilization bonds and three-year government bonds from 2011 to 2019. Additionally, the standing facility introduced in 2008 had a negative effect on these liquidity premia.

Suggested Citation

  • Seungduck Lee, 2025. "Asset Liquidity and Monetary Policy," Annals of Economics and Finance, Society for AEF, vol. 26(1), pages 443-463, May.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:1:lee
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    References listed on IDEAS

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    8. Athanasios Geromichalos & Jiwon Lee & Seungduck Lee & Keita Oikawa, 2016. "Over-the-counter trade and the value of assets as collateral," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 443-475, August.
    9. Shin, Dongheon & Kim, Baeho, 2015. "Liquidity and credit risk before and after the global financial crisis: Evidence from the Korean corporate bond market," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 38-61.
    10. Athanasios Geromichalos & Lucas Herrenbrueck, 2016. "Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 35-79, February.
    11. Athanasios Geromichalos & Juan M Licari & Jose Suarez-Lledo, 2007. "Monetary Policy and Asset Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 761-779, October.
    12. Seungduck Lee, 2020. "Money, Asset Prices, and the Liquidity Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1435-1466, September.
    13. Seungduck Lee & Kuk Mo Jung, 2020. "A Liquidity‐Based Resolution of the Uncovered Interest Parity Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1397-1433, September.
    14. Geromichalos, Athanasios & Jung, Kuk Mo & Lee, Seungduck & Carlos, Dillon, 2021. "A model of endogenous direct and indirect asset liquidity," European Economic Review, Elsevier, vol. 132(C).
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    More about this item

    Keywords

    Liquidity; Liquidity Premium; Nominal Interest Rate; Government Bond; Monetary Stabilization Bond;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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