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

Arvind Krishnamurthy and Wenhao Li

No 30051, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors' 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 1934 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 delivered by each asset. Treasury bonds and bank deposits are imperfect substitutes, in contrast to the findings of perfect substitutes of Nagel (2016). This result is directly relevant to the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the imperfect substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system. We construct a new broad monetary aggregate based on our estimates and show that it helps resolve the money-demand instability and missing-money puzzles of the monetary economics literature.

JEL-codes: E41 E43 G21 G23 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon and nep-pay
Note: AP CF ME
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Published as Arvind Krishnamurthy & Wenhao Li & Gregor Matvos, 2023. "The Demand for Money, Near-Money, and Treasury Bonds," The Review of Financial Studies, vol 36(5), pages 2091-2130.

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