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Monetary Transaction Costs and the Term Premium

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  • Raphael A Espinoza
  • Dimitrios P. Tsomocos

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.

Suggested Citation

  • Raphael A Espinoza & Dimitrios P. Tsomocos, 2013. "Monetary Transaction Costs and the Term Premium," IMF Working Papers 13/85, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/85
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    References listed on IDEAS

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    Keywords

    Liquidity; Liquidity; Cash-in-advance constraints; Term structure of interest rates; money supply; quantity theory of money; central bank; quantity theory; theory of money; Asset Pricing;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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