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Private Money Creation with Safe Assets and Term Premia

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Abstract

It has been documented that an increase in the demand for safe assets induces the private sector to create more money-like claims. Focusing on private repos backed by U.S. Treasury securities, I show that an increase in the demand for safe assets leads to a decreases in the issuance of Treasury repos. The intuition is that Treasury securities already function as a safe asset, thus in terms of safe asset creation, private Treasury repos are neutral. In the model, Treasury repos are beneficial because they shift risk (i.e. term premia) from relatively risk averse households to a more risk tolerant financial sector, which issues repos to finance its portfolio. When the demand for safe assets increases, Treasury securities are reallocated to households, reducing the amount of Treasury repo issued by the financial sector. By contrast, Treasury repos created by the Federal Reserve's RRP program---a safe asset created by the public sector---increase with the demand for safe as sets. I show the data supports the model's main predictions.

Suggested Citation

  • Sebastian Infante, 2017. "Private Money Creation with Safe Assets and Term Premia," Finance and Economics Discussion Series 2017-041, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2017-41
    DOI: 10.17016/FEDS.2017.041
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    References listed on IDEAS

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    1. Krishnamurthy, Arvind & Vissing-Jorgensen, Annette, 2015. "The impact of Treasury supply on financial sector lending and stability," Journal of Financial Economics, Elsevier, vol. 118(3), pages 571-600.
    2. Robin Greenwood & Samuel G. Hanson & Jeremy C. Stein, 2015. "A Comparative-Advantage Approach to Government Debt Maturity," Journal of Finance, American Finance Association, vol. 70(4), pages 1683-1722, August.
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    More about this item

    Keywords

    Federal Reserve Board and Federal Reserve System; Monetary policy; Private money; Repo; Safe assets;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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