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The Impact of Treasury Supply on Financial Sector Lending and Stability

Author

Listed:
  • Arvind KRISHNAMURTHY

    (Stanford University and National Bureau of Economic Research)

  • Annette VISSING-JORGENSEN

    (National Bureau of Economic Research, University of California, Berkeley, and Center for Economic Policy Research)

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

  • Arvind KRISHNAMURTHY & Annette VISSING-JORGENSEN, 2015. "The Impact of Treasury Supply on Financial Sector Lending and Stability," Swiss Finance Institute Research Paper Series 15-46, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1546
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    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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