A Comparative‐Advantage Approach to Government Debt Maturity

Abstract

We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We extend the model to allow private financial intermediaries to compete with the government in the provision of short-term money-like claims. We argue that, if there are negative externalities associated with private money creation, the government should tilt its issuance more toward short maturities, thereby partially crowding out the private sector's use of short-term debt. * Greenwood and Hanson are with Harvard Business School. Stein is with Harvard University. We thank

Presidential Address: Pension Policy and the Financial System

“…In these models, the main function of banks is to offer households safe and liquid instruments for their savings. Models along these lines include Gorton and Pennacchi () and, more recently, Stein (), DeAngelo and Stulz (), Greenwood, Hanson, and Stein (), and Diamond (). The last of these papers is specifically interested in understanding which types of activities are funded by banks versus capital markets.…”

Near-Money Premiums, Monetary Policy, and the Integration of Money Markets: Lessons from Deregulation

“…Our research contributes to a recent but rapidly growing body of work that examines the role that safe assets play in the financial system and how the supply of government-issued securities affects the pricing of close substitutes issued by the private sector (e.g., Gorton, Lewellen, and Metrick 2012;Gorton 2015;Vissing-Jorgensen 2012, 2013;Greenwood, Hanson and Stein 2015;Sunderam 2015;. 14 This work argues 14 Studies of the relationship between Eurodollar rates and Treasury yields are almost as old as the Eurodollar market.…”

“…Following this literature, we estimate an empirical pricing model to investigate how changes in the supply of risk-free, liquid government securities and other market and regulatory conditions affected pricing of Eurodollars and negotiable CDs when those securities were first coming into widespread usage during the 1960s and 1970s. Following Greenwood et al (2015) and , we use U.S. Treasury bills (T-bills) for the alternative, safe asset, and estimate models of the spreads between market interest rates on Eurodollars and CDs and T-bill yields. T-bills are very liquid and have short maturities and duration, which makes them particularly advantageous to investors seeking to hold safe liquid assets.…”

“…We begin by investigating whether the new money market instruments displayed the characteristics of safe, near-money instruments as described in Gorton, Lewellen, and Metrick (2012); Vissing-Jorgensen (2012, 2013); Carlson, Duygan-Bump, Natalucci, Nelson, Ochoa, Stein, and Van den Heuval (2014); Gorton (2015); Greenwood Hanson and Stein (2015); and Sunderam (2015). This literature argues that investors have a preference, and will pay a "near money" premium, for assets that are safe, liquid, and easily convertible to cash.…”

“…Thus, changes in the supply of Treasury securities should influence both the issuance of private money market securities and the spreads between those instruments and comparable maturity Treasury securities. Following Greenwood et al (2015) and , we test whether the supply of Treasury bills in particular affected the use and pricing of negotiable CDs and Eurodollars. We find that increases in the supply of Treasury bills reduced the spreads between the yields on private instruments and Treasury bills.…”