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The Imperfect Intermediation of Money‐Like Assets

Jeremy C. Stein¹; JONATHAN WALLEN²

¹ Dana-Farber/Harvard Cancer Center · ² Jeremy C. Stein is with Harvard University and NBER. Jonathan Wallen is with Harvard Business School. We are grateful to Wenxin Du; Robin Greenwood; Sam Hanson; Sebastian Hillenbrand; Victoria Ivashina; Adi Sunderam; Luis Viceira; seminar and conference participants at HBS, UMass Amherst, and the 20

ABSTRACT We study supply‐and‐demand effects in the U.S. Treasury bill market by comparing the returns on T‐bills to the policy rate on the Federal Reserve's reverse repurchase (RRP) facility. We develop and test a simple model where the RRP‐bill spread is policed both by heterogeneously elastic money funds and by corporate treasurers who derive collateral benefits from holding T‐bills. In response to shifts in T‐bill supply, money funds act as front‐line arbitrageurs. However, when T‐bills become extremely scarce, less elastic corporate treasurers become the marginal investors and supply shifts have a larger effect on T‐bill rates.

DOI

10.1111/jofi.13500

Volume

80 (6)

Pages

3185-3221

Language

en

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