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The impact of Treasury supply on financial sector lending and stability

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  • Krishnamurthy, Arvind
  • Vissing-Jorgensen, Annette

Abstract

We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the nonfinancial sector. This demand drives a premium on safe and liquid assets that the financial sector exploits by owning risky and illiquid assets and writing safe and liquid claims against them. The central prediction of the theory is that safe and liquid government debt should crowd out financial sector lending financed by short-term debt. We verify this prediction with US data from 1875 to 2014. We take a series of approaches to rule out standard crowding out via real interest rates and to address potential endogeneity concerns.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jfinec:v:118:y:2015:i:3:p:571-600
    DOI: 10.1016/j.jfineco.2015.08.012
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    More about this item

    Keywords

    Treasury supply; Monetary economics; Financial stability; Banking;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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