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The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies

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Abstract

A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for \"money-like\" claims--short-term, safe instruments (STSI)--from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or repo. In this paper, we take the demand for STSI as given and consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of STSI. The first part of the paper provides new evidence that complements the existing literature on two key ingredients that are necessary for there to be a role for policy: the extent to which public short-term debt and private short-term debt might be substitutes, and the relationship between the money premium and the supply of STSI. The second part of the paper then builds on this evidence and discusses potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets that will be available to financial market participants.

Suggested Citation

  • Mark A. Carlson & Burcu Duygan-Bump & Fabio M. Natalucci & William R. Nelson & Marcelo Ochoa & Jerome L. Stein & Skander J. Van den Heuvel, 2014. "The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies," Finance and Economics Discussion Series 2014-102, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2014-102
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 57-95.
    3. Robin Greenwood & Samuel Hanson & Jeremy C. Stein, 2010. "A Gap‐Filling Theory of Corporate Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 65(3), pages 993-1028, June.
    4. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, November.
    5. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary Policy Operations Redux
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2019-10-28 12:57:07

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    Cited by:

    1. Gara Afonso & Kyungmin Kim & Antoine Martin & Ed Nosal & Simon M. Potter & Sam Schulhofer-Wohl, 2020. "Monetary policy implementation with an ample supply of reserves," Working Paper Series WP-2020-02, Federal Reserve Bank of Chicago.
    2. Marcin Kacperczyk & Christophe Pérignon & Guillaume Vuillemey, 2021. "The Private Production of Safe Assets," Journal of Finance, American Finance Association, vol. 76(2), pages 495-535, April.
    3. Lugo, Stefano, 2021. "Short-term debt catering," Journal of Corporate Finance, Elsevier, vol. 66(C).
    4. De Fiore, Fiorella & Hoerova, Marie & Uhlig, Harald, 2018. "Money Markets, Collateral and Monetary Policy," CEPR Discussion Papers 13335, C.E.P.R. Discussion Papers.
    5. Pierre Yared & Marina Azzimonti, 2017. "The Public and Private Provision of Safe Assets," 2017 Meeting Papers 755, Society for Economic Dynamics.
    6. Michael Woodford, 2016. "Quantitative Easing and Financial Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Elías Albagli & Diego Saravia & Michael Woodford (ed.),Monetary Policy through Asset Markets: Lessons from Unconventional Measures and Implications for an Integrated World, edition 1, volume 24, chapter 6, pages 151-233, Central Bank of Chile.
    7. William Arrata & Benoit Nguyen & Imene Rahmouni-Rousseau & Miklos Vari, 2018. "The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area," IMF Working Papers 2018/258, International Monetary Fund.
    8. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
    9. Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    10. David B. Cashin & Erin E. Syron Ferris & Elizabeth C. Klee, 2020. "Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses," Finance and Economics Discussion Series 2020-008, Board of Governors of the Federal Reserve System (U.S.).
    11. Zulfi Diane Zaini, 2018. "Functions of the Bank of Indonesia as Lender ofLast Resort for Banks\' Safety," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 607-621.
    12. Thomas M. Eisenbach & Gregory Phelan, 2022. "Fragility of Safe Asset Markets," Staff Reports 1026, Federal Reserve Bank of New York.
    13. Christophe Blot & Jérôme Creel & Paul Hubert, 2017. "What should the ECB "New Normal" look like ?," Post-Print hal-03567432, HAL.
    14. Infante, Sebastian, 2020. "Private money creation with safe assets and term premia," Journal of Financial Economics, Elsevier, vol. 136(3), pages 828-856.
    15. Ye Li, 2018. "Fragile New Economy: The Rise of Intangible Capital and Financial Instability," 2018 Meeting Papers 1189, Society for Economic Dynamics.
    16. Massimiliano Affinito, 2019. "What do almost 20 years of micro data and two crises say about the relationship between central bank and interbank market liquidity? Evidence from Italy," BIS Working Papers 821, Bank for International Settlements.
    17. Zulfi Diane Zaini, 2018. "Functions of the Bank of Indonesia as Lender ofLast Resort for Banks\' Safety," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 607-621.
    18. Glick, Reuven, 2020. "r* and the global economy," Journal of International Money and Finance, Elsevier, vol. 102(C).
    19. Jason Allen & Jakub Kastl & Milena Wittwer, 2020. "Maturity Composition and the Demand for Government Debt," Staff Working Papers 20-29, Bank of Canada.
    20. Efraim Benmelech & Nittai Bergman, 2018. "Debt, Information, and Illiquidity," NBER Working Papers 25054, National Bureau of Economic Research, Inc.
    21. Golec, Pascal & Perotti, Enrico, 2017. "Safe assets: a review," Working Paper Series 2035, European Central Bank.

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    Keywords

    Financial stability; safe assets; money-like instruments; central bank policies;
    All these keywords.

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