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Treasury Market Dysfunction and the Role of the Central Bank

Author

Listed:
  • Anil K Kashyap

    (University of Chicago)

  • Jeremy C. Stein

    (Harvard University)

  • Jonathan L. Wallen

    (Harvard Business School)

  • Joshua Younger

    (Columbia University)

Abstract

We build a simple model that shows how the incentives and constraints facing three key types of market players - broker-dealers, hedge funds, and asset managers - interact to create a heightened level of fragility in the Treasury market, and how this fragility can become more pronounced as the supply of Treasury securities increases. After validating a number of the model's empirical premises and implications, we ask what it can tell us about how the Federal Reserve might best address future episodes of market dysfunction. In so doing, we take as given that an important priority for any Fed response to Treasury market dysfunction is that it be clearly separated from anything having to do with monetary policy.

Suggested Citation

  • Anil K Kashyap & Jeremy C. Stein & Jonathan L. Wallen & Joshua Younger, 2025. "Treasury Market Dysfunction and the Role of the Central Bank," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 56(1 (Spring), pages 221-296.
    • Handle: RePEc:bin:bpeajo:v:56:y:2025:i:2025-01:p:221-296
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    Cited by:

    1. Li, Jian & Ma, Yiming & Mendicino, Caterina & Supera, Dominik, 2026. "Bank to non-bank lending and the reallocation of credit," Working Paper Series 3220, European Central Bank.
    2. Wenxin Du & Ritt Keerati & Jesse Schreger, 2025. "Decoupling Dollar and Treasury Privilege," International Finance Discussion Papers 1427, Board of Governors of the Federal Reserve System (U.S.).

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