Private Money Creation with Safe Assets and Term Premia
73 Pages Posted: 7 Sep 2016 Last revised: 11 Apr 2019
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Private Money Creation with Safe Assets and Term Premia
Private Money Creation with Safe Assets and Term Premia
Date Written: February 10, 2019
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 RRP program has the same sign as existing studies.
Keywords: safe assets, private money, repo, monetary policy, Federal Reserve
JEL Classification: G2, G12, E4, E51
Suggested Citation: Suggested Citation