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

Arvind Krishnamurthy and Wenhao Li
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Arvind Krishnamurthy: Stanford Graduate School of Business and NBER
Wenhao Li: Stanford Graduate School of Business and NBER

Research Papers from Stanford University, Graduate School of Business

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.

JEL-codes: E41 E44 E63 G12 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3991

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