The Impact of Treasury Supply on Financial Sector Lending and Stability

Arvind Krishnamurthy and Annette Vissing-Jorgensen

Research Papers from Stanford University, Graduate School of Business

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 non-financial 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 those. The central prediction of the theory is that government debt (in practice this is predominantly Treasuries) should crowd out financial sector lending financed by short-term debt. We verify this prediction in U.S. data from 1875-2014. We take a series of approaches to rule our "standard" crowding out via real interest rates and to address potential endogeneity concerns.

Date: 2015-04
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Related works:
Journal Article: The impact of Treasury supply on financial sector lending and stability (2015)
Working Paper: The Impact of Treasury Supply on Financial Sector Lending and Stability (2015)
Working Paper: The Impact of Treasury Supply on Financial Sector Lending and Stability (2015)
Chapter: The Impact of Treasury Supply on Financial Sector Lending and Stability (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3276

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