IMF paper uses monetary model to explain term premium


An International Monetary Fund working paper, published on April 3, argues that risk in the functioning of markets and in the liquidity of assets may generate a term premium – an excess of yield on long-term bonds over short-term bonds.

The paper – Monetary Transaction Costs and the Term Premium, by Raphael Espinoza and Dimitrios Tsomocos – says that asset prices depend on "both the supply of the liquidity by the central bank and the liquidity of assets and commodities".

Notably, the paper says

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