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The price of money: The reserves convertibility premium over the term structure


Nyborg, Kjell G; Woschitz, Jiri (2023). The price of money: The reserves convertibility premium over the term structure. CEPR Discussion Papers 18371, University of Zurich.

Abstract

Central-bank money provides utility by serving as means of exchange for virtually all transactions in the economy. New reserves (money) are issued to banks in exchange for collateral such as government bonds. An asset's degree of direct convertibility into fresh reserves may affect its utility and, consequently, its market price. We show the existence of a government-bond reserves convertibility premium, which tapers off at longer maturities. Essentially, there is a pure monetary component to some asset prices. Our findings have implications for our understanding of liquidity premia, the term structure of interest rates, and the impact of central-bank collateral policy.

Abstract

Central-bank money provides utility by serving as means of exchange for virtually all transactions in the economy. New reserves (money) are issued to banks in exchange for collateral such as government bonds. An asset's degree of direct convertibility into fresh reserves may affect its utility and, consequently, its market price. We show the existence of a government-bond reserves convertibility premium, which tapers off at longer maturities. Essentially, there is a pure monetary component to some asset prices. Our findings have implications for our understanding of liquidity premia, the term structure of interest rates, and the impact of central-bank collateral policy.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
JEL Classification:G12, E43, E52
Scope:Discipline-based scholarship (basic research)
Language:English
Date:16 August 2023
Deposited On:19 Sep 2023 14:40
Last Modified:06 Mar 2024 14:40
Series Name:CEPR Discussion Papers
Number of Pages:55
ISSN:0265-8003
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://cepr.org/publications/dp18371
Other Identification Number:merlin-id:24065
  • Content: Published Version
  • Language: English