The Demand for Money, Near-Money, and Treasury Bonds

67 Pages Posted: 16 May 2022 Last revised: 29 May 2022

See all articles by Arvind Krishnamurthy

Arvind Krishnamurthy

Stanford Graduate School of Business

Wenhao Li

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2022


Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors' demand for a liquid transaction medium and safe store of value. We measure the quantity of these three forms of liquidity and their corresponding liquidity premium over a sample from 1934 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per unit delivered by each asset. Treasury bonds and bank deposits are imperfect substitutes, in contrast to the findings of perfect substitutes of Nagel (2016). This result is directly relevant to the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the imperfect substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system. We construct a new broad monetary aggregate based on our estimates and show that it helps resolve the money-demand instability and missing-money puzzles of the monetary economics literature.

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Suggested Citation

Krishnamurthy, Arvind and Li, Wenhao, The Demand for Money, Near-Money, and Treasury Bonds (May 2022). NBER Working Paper No. w30051, Available at SSRN: or

Arvind Krishnamurthy (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Wenhao Li

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States


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