Inflation and Treasury Convenience

Anna Cieslak, Wenhao Li and Carolin Pflueger

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

Abstract: Using a century of data, we show that Treasury convenience yield and inflation comove positively during the inflationary 1970s-1980s, but negatively pre-WWII and post-2000. An inflation decomposition reveals that higher supply inflation predicts higher convenience, while lower demand inflation follows higher convenience. In our model, inflationary cost-push shocks raise the opportunity cost of holding money and money-like assets, inducing higher convenience, as in 1970s-1980s. Conversely, liquidity demand shocks drive up convenience but lower consumption demand and inflation in the model, as pre-WWII and post-2000. By linking the evidence to macroeconomic drivers, our results challenge the notion that inflation directly depresses Treasury convenience.

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