Inflation and Treasury Convenience

Anna Cieslak, Wenhao Li and Carolin Pflueger

No 32881, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that U.S. Treasury convenience yields moved positively with inflation during the inflationary second half of the 20th century but not before WWII or after 2000. A macro-asset pricing model explains this shift through two channels. Inflationary supply shocks raise the opportunity cost of holding money and money-like assets, endogenously increasing convenience yields. In contrast, exogenous liquidity demand shocks elevate convenience but depress consumption and inflation. The model estimates an increased relative importance of liquidity demand shocks after 2000. This channel weakens the convenience–inflation comovement and contributes to negative bond-stock betas, as distinct from non-liquidity demand shocks.

JEL-codes: E44 E58 G01 G28 (search for similar items in EconPapers)
Date: 2024-08
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