The Liquidity Premium of Near-Money Assets

Stefan Nagel

NBER Working Paper No. 20265
Issued in June 2014
NBER Program(s):Asset Pricing, Monetary Economics

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.

download in pdf format
   (500 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20265

Published: Stefan Nagel, 2016. "The Liquidity Premium of Near-Money Assets," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1927-1971. citation courtesy of

Users who downloaded this paper also downloaded* these:
Backus, Ferriere, and Zin w20319 Risk and Ambiguity in Models of Business Cycles
Fang, Gu, and Zhou w20317 The Gradients of Power: Evidence from the Chinese Housing Market
Eika, Mogstad, and Zafar w20271 Educational Assortative Mating and Household Income Inequality
Jacobsen, LaRiviere, and Price w20266 Public Goods Provision in the Presence of Heterogeneous Green Preferences
Eichengreen, Mehl, Chitu, and Richardson w20267 Mutual Assistance between Federal Reserve Banks, 1913-1960 as Prolegomena to the TARGET2 Debate
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us