Private Money Creation with Safe Assets and Term Premia

Sebastian Infante
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Sebastian Infante: https://www.federalreserve.gov/econres/sebastian-infante.htm

No 2017-041, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: It has been documented that an increase in the demand for safe assets induces the private sector to create more money-like claims. Focusing on private repos backed by U.S. Treasury securities, I show that an increase in the demand for safe assets leads to a decreases in the issuance of Treasury repos. The intuition is that Treasury securities already function as a safe asset, thus in terms of safe asset creation, private Treasury repos are neutral. In the model, Treasury repos are beneficial because they shift risk (i.e. term premia) from relatively risk averse households to a more risk tolerant financial sector, which issues repos to finance its portfolio. When the demand for safe assets increases, Treasury securities are reallocated to households, reducing the amount of Treasury repo issued by the financial sector. By contrast, Treasury repos created by the Federal Reserve's RRP program---a safe asset created by the public sector---increase with the demand for safe as sets. I show the data supports the model's main predictions.

Keywords: Federal Reserve Board and Federal Reserve System; Monetary policy; Private money; Repo; Safe assets (search for similar items in EconPapers)
JEL-codes: E4 E51 G12 G2 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2017-04-11
New Economics Papers: this item is included in nep-mac and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-41

DOI: 10.17016/FEDS.2017.041

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