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

27 Pages Posted: 31 May 2017

See all articles by Mark A. Carlson

Mark A. Carlson

Board of Governors of the Federal Reserve System

Burcu Duygan-Bump

Board of Governors of the Federal Reserve System

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

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November, 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.

Suggested Citation

Carlson, Mark A. and Duygan-Bump, Burcu and Natalucci, Fabio Massimo and Nelson, William Richard 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, 2014). Available at SSRN: https://ssrn.com/abstract=2976902

Mark A. Carlson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-3987 (Phone)
(202) 452-2301 (Fax)

Burcu Duygan-Bump

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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

Board of Governors of the Federal Reserve System ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
112
Abstract Views
982
rank
143,007
PlumX Metrics