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Money, Asset Prices, and the Liquidity Premium

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  • SEUNGDUCK LEE

Abstract

This paper examines the effect of monetary policy on the market value of the liquidity services that financial assets provide, known as the liquidity premium. The theory predicts that money supply and nominal interest rates have positive effects on the liquidity premium, but asset supply has a negative effect. The empirical analysis with U.S. data confirms the theoretical predictions. The theory also proposes that the liquidity properties of assets can cause negative nominal yields when the money holding cost is low and liquid assets are scarce. The suggestive empirical findings in Switzerland to support this theoretical result are presented.

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  • 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.
    • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:6:p:1435-1466
    DOI: 10.1111/jmcb.12637
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    References listed on IDEAS

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