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Monetary policy financial transmission and treasury liquidity premia

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  • Maxime Phillot
  • Samuel Reynard

Abstract

We quantify the effects of monetary policy shocks on the yield curve through their impact on Treasury liquidity premia. When the Fed raises interest rates, the spread between less-liquid assets and Treasuries of the same maturity and risk increases, as the liquidity value of holding Treasuries increases when the aggregate volume of banks’ customer deposits decreases. The longer the maturity is, the smaller - but still significant - the increase in the liquidity premium is, as longer-term Treasuries are less liquid. Due to this change in liquidity premia, the spread between a 10-year Treasury bond and a 3-month T-bill yield increases by approximately 5 basis points for a one-percentage-point increase in the policy rate, i.e., the Treasury yield curve steepens, ceteris paribus.

Suggested Citation

  • Maxime Phillot & Samuel Reynard, 2021. "Monetary policy financial transmission and treasury liquidity premia," Working Papers 2021-14, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2021-14
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    References listed on IDEAS

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    Cited by:

    1. Marieh Azizirad, 2022. "Fisher vs Keynes: Does an Interest Rate Hike Cause Inflation to Increase or Decrease?," Discussion Papers dp22-08, Department of Economics, Simon Fraser University.

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    More about this item

    Keywords

    Treasury liquidity premia; monetary policy; yield curve; deposit channel;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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