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The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies

Author

Listed:
  • Mark Carlson

    (Federal Reserve Board of Governors)

  • Burcu Duygan-Bump

    (Federal Reserve Baoard of Governors)

  • Fabio Natalucci

    (Federal Reserve Board of Governors)

  • Bill Nelson

    (The Clearing House)

  • Marcelo Ochoa

    (Federal Reserve Board of Governors)

  • Jeremy Stein

    (Harvard University)

  • Skander Van den Heuvel

    (Federal Reserve Board of Governors, European Central Bank)

Abstract

In this paper, we consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of short-term, safe instruments (STSI). First, we provide new evidence on two key ingredients for there to be a role for policy: the extent to which public and private shortterm debt are substitutes, and the relationship between the supply of STSI and the money premium, stemming from their liquid, short-term, and safe nature. Then, we discuss potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets available to financial market participants.

Suggested Citation

  • Mark Carlson & Burcu Duygan-Bump & Fabio Natalucci & Bill Nelson & Marcelo Ochoa & Jeremy Stein & Skander Van den Heuvel, 2016. "The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 307-333, December.
    • Handle: RePEc:ijc:ijcjou:y:2016:q:4:a:8
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 57-95.
    3. Robin Greenwood & Samuel Hanson & Jeremy C. Stein, 2010. "A Gap‐Filling Theory of Corporate Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 65(3), pages 993-1028, June.
    4. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, Decembrie.
    5. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    6. Adam Kirk & James J. McAndrews & Parinitha Sastry & Phillip Weed, 2014. "Matching collateral supply and financing demands in dealer banks," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 127-151.
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