Private money creation with safe assets and term premia

Sebastian Infante

Journal of Financial Economics, 2020, vol. 136, issue 3, 828-856

Abstract: The existing literature has shown that an increase in the demand for safe assets induces the private sector to create more of them. Focusing on repos backed by US Treasuries, I theoretically and empirically show that an increase in the demand for safe assets leads to a decrease in repos outstanding. Because Treasuries are safe assets, an increase in the demand for safe assets compresses their term premia, reducing incentives to issue repos. Thus, the sensitivity of private safe asset creation depends on whether the collateral backing them are safe assets themselves. The sensitivity of the Federal Reserve’s reverse repurchase agreement (RRP) operations has the same sign as existing studies.

Keywords: Safe assets; Private money; Repo; Monetary policy; Federal Reserve (search for similar items in EconPapers)
JEL-codes: E41 E51 G12 G24 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:3:p:828-856

DOI: 10.1016/j.jfineco.2019.11.007

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