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

Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors’ demand for liquidity. We measure the quantity of these forms of liquidity and their corresponding liquidity premium in a sample from 1934 to 2016, estimating the substitutability of these assets and the liquidity per-unit delivered by each asset.  Treasuries and bank transaction-deposits are imperfect substitutes, in contrast to Nagel (2016)’s finding of perfect substitutes.  Bank and non-bank non-transaction-deposits are closer substitutes for Treasuries. Our empirical results inform theories of the monetary transmission mechanism running through shifts in asset supplies and models of the coexistence of the shadow-banking and regulated-banking system.