The Liquidity Premium of Safe Assets: The Role of Government Debt Supply
10 Pages Posted: 1 Jun 2017 Last revised: 4 May 2018
Date Written: April 26, 2018
This paper studies the impact of government debt supply on the liquidity premium, as measured by the yield spread between public and private safe assets. I test, at a quarterly frequency, how the liquidity premium of Treasury bills against i) Aaa-rated corporate bonds and ii) commercial paper responds to government debt supply changes. The response is significant in each case – even after controlling for the opportunity cost of money – but heterogeneous: negative for Aaa-rated corporate bonds and positive for commercial paper. This points to different degrees of substitutability with government debt across apparently similar private safe assets.
Keywords: Government Debt, Liquidity Premium, Safe Assets
JEL Classification: E43, G12, E41
Suggested Citation: Suggested Citation