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The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies

27 Pages Posted: 10 Dec 2014  

Mark A. Carlson

Board of Governors of the Federal Reserve System; Bank for International Settlements (BIS)

Burcu Duygan-Bump

Federal Reserve Board

Fabio M. Natalucci

U.S. Federal Reserve Board - Division of Monetary Affairs

William R. Nelson

Board of Governors of the Federal Reserve System

Marcelo Ochoa

Board of Governors of the Federal Reserve System

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Skander Van den Heuvel

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: November 25, 2014

Abstract

A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for "money-like" claims — short-term, safe instruments (STSI) — from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or repo. In this paper, we take the demand for STSI as given and consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of STSI. The first part of the paper provides new evidence that complements the existing literature on two key ingredients that are necessary for there to be a role for policy: the extent to which public short-term debt and private short-term debt might be substitutes, and the relationship between the money premium and the supply of STSI. The second part of the paper then builds on this evidence and discusses potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets that will be available to financial market participants.

Keywords: Financial stability, safe assets, money-like instruments, central bank policies

JEL Classification: E58, G01, G18

Suggested Citation

Carlson, Mark A. and Duygan-Bump, Burcu and Natalucci, Fabio M. and Nelson, William R. and Ochoa, Marcelo and Stein, Jeremy C. and Van den Heuvel, Skander, The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies (November 25, 2014). FEDS Working Paper No. 2014-102. Available at SSRN: https://ssrn.com/abstract=2534578 or http://dx.doi.org/10.2139/ssrn.2534578

Mark A. Carlson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Burcu Duygan-Bump (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, N.W.
Washington, DC 20551
United States
2029124663 (Phone)

Fabio Massimo Natalucci

U.S. Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Street, N.W.
Washington, DC 20551
United States
202-452-3052 (Phone)
202-736-5638 (Fax)

William Richard Nelson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Marcelo Ochoa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Skander Van den Heuvel

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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