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 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. Model estimates show that spikes in liquidity demand after 2000 account for the weaker convenience–inflation link and the emergence of negative bond-stock betas, distinguishing liquidity from non-liquidity demand shocks.

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