The liquidity premium of safe assets: The role of government debt supply

Qizhou Xiong

No 11/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: The persistent premium of government debt attributes to two main reasons: absolute nominal safety and liquidity. This paper employs two types of measures of government debt supply to disentangle the safety and liquidity part of the premium. The empirical evidence shows that, after controlling for the opportunity cost of money, the quantitative impact of total government debt-to-GDP ratio is still significant and negative, which is consistent with the theoretical predictions of the CAPM with utility surplus of holding convenience assets. The relative availability measure, the ratio of total government liability to all sector total liability, separates the liquidity premium from the safety premium and has a negative impact too. Both theoretical and empirical results suggest that the substitutability between government debt and private safe assets dictates the quantitative impact of the government debt supply.

Keywords: safe asset; government debt; liquidity premium; safety premium (search for similar items in EconPapers)
JEL-codes: E41 E43 G12 (search for similar items in EconPapers)
Date: 2018, Revised 2018
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:112017

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