The Impact of Treasury Supply on Financial Sector Lending and Stability

Arvind Krishnamurthy and Vissing-Jørgensen, Annette
Authors registered in the RePEc Author Service: Annette Vissing-Jorgensen

No 10717, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the non-financial sector. This demand drives a premium on safe and liquid assets that the financial sector exploits by owning risky and illiquid assets and writing safe and liquid claims against those. The central prediction of the theory is that safe and liquid government debt should crowd out financial sector lending financed by short-term debt. We verify this prediction in U.S. data from 1875-2014. We take a series of approaches to rule out ?standard" crowding out via real interest rates and to address potential endogeneity concerns.

Keywords: Banking; Treasury supply; Monetary economics; Financial stability (search for similar items in EconPapers)
JEL-codes: E4 G12 G2 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (101)

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Related works:
Journal Article: The impact of Treasury supply on financial sector lending and stability (2015)
Working Paper: The Impact of Treasury Supply on Financial Sector Lending and Stability (2015)
Working Paper: The Impact of Treasury Supply on Financial Sector Lending and Stability (2015)
Chapter: The Impact of Treasury Supply on Financial Sector Lending and Stability (2013)
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