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The Demand for Money, Near-Money, and Treasury Bonds

Author

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  • Krishnamurthy, Arvind

    (Stanford Graduate School of Business and NBER)

  • Li, Wenhao

    (Stanford Graduate School of Business and NBER)

Abstract

Bank-created money, shadow-bank money, and Treasury bonds all satisfy investor’s demand for a liquid transaction medium and safe store of value. We measure the quantity of these three forms of liquidity and their corresponding liquidity premium over a sample from 1926 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per-unit-of-asset delivered by each asset. We construct a new broad monetary aggregate based on our analysis and show that it helps resolves the money-demand instability and missing-money puzzles of the monetary economics literature. Our empirical results inform models of the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system.

Suggested Citation

  • Krishnamurthy, Arvind & Li, Wenhao, 2021. "The Demand for Money, Near-Money, and Treasury Bonds," Research Papers 3991, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3991
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    File URL: https://www.gsb.stanford.edu/faculty-research/working-papers/demand-money-near-money-treasury-bonds
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    Cited by:

    1. Du, Wenxin & Hébert, Benjamin & Li, Wenhao, 2023. "Intermediary balance sheets and the treasury yield curve," Journal of Financial Economics, Elsevier, vol. 150(3).
    2. Sundaresan, Suresh & Xiao, Kairong, 2024. "Liquidity regulation and banks: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 151(C).
    3. Laséen, Stefan, 2023. "Central bank asset purchases: Insights from quantitative easing auctions of government bonds," Working Paper Series 419, Sveriges Riksbank (Central Bank of Sweden).
    4. Pelizzon, Loriana & Mattiello, Riccardo & Schlegel, Jonas, 2025. "Growth of non-bank financial intermediaries, financial stability, and monetary policy," SAFE Working Paper Series 458, Leibniz Institute for Financial Research SAFE.
    5. Pelizzon, Loriana & Mattiello, Riccardo & Schlegel, Jonas, 2025. "Growth of non-bank financial intermediaries, financial stability, and monetary policy: Prepared for the ECB Forum," SAFE White Paper Series 114, Leibniz Institute for Financial Research SAFE.
    6. Lucas Herrenbrueck, Zijian Wang, 2023. "Interest Rates, Moneyness, and the Fisher Equation," Discussion Papers dp23-11, Department of Economics, Simon Fraser University.
    7. Marieh Azizirad, 2022. "Fisher vs Keynes: Does an Interest Rate Hike Cause Inflation to Increase or Decrease?," Discussion Papers dp22-08, Department of Economics, Simon Fraser University.
    8. Jonathan Witmer, 2025. "The Optimum Quantity of Central Bank Reserves," Staff Working Papers 25-15, Bank of Canada.
    9. Li, Kai & Xu, Chenjie, 2024. "Intermediary-based equity term structure," Journal of Financial Economics, Elsevier, vol. 157(C).
    10. Ragnar Juelsrud & Plamen Nenov & Fabienne Schneider & Olav Syrstad, 2025. "Money Talks: Transaction Costs, the Value of Convenience, and the Cross-Section of Safe Asset Returns," Staff Working Papers 25-34, Bank of Canada.

    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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