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The Impact of Treasury Supply on Financial Sector Lending and Stability

91 Pages Posted: 11 Nov 2015  

Arvind Krishnamurthy

Northwestern University - Kellogg School of Management

Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business

Date Written: November 1, 2015

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 nonfinancial 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 them. 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 with US data from 1875 to 2014. We take a series of approaches to rule out standard crowding out via real interest rates and to address potential endogeneity concerns.

Keywords: Reasury Supply, Monetary Economics, Financial stability, Banking

JEL Classification: G12, G2, E4

Suggested Citation

Krishnamurthy, Arvind and Vissing-Jorgensen, Annette, The Impact of Treasury Supply on Financial Sector Lending and Stability (November 1, 2015). Swiss Finance Institute Research Paper No. 15-46. Available at SSRN: https://ssrn.com/abstract=2688957 or http://dx.doi.org/10.2139/ssrn.2688957

Arvind Krishnamurthy

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2671 (Phone)
847-491-5719 (Fax)

Annette Vissing-Jorgensen (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California Berkeley, Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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