Short-term Debt and Financial Crises: What we can learn from U.S. Treasury Supply

@inproceedings{Krishnamurthy2012ShorttermDA,
  title={Short-term Debt and Financial Crises: What we can learn from U.S. Treasury Supply},
  author={Arvind Krishnamurthy and Annette Vissing-Jorgensen},
  year={2012}
}
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 non-financial 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 those. The central prediction of the theory is that government debt (in practice this is predominantly Treasuries) should crowd out the net supply of… CONTINUE READING

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