The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies

In this paper, we consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of short-term, safe instruments (STSI). First, we provide new evidence on two key ingredients for there to be a role for policy: the extent to which public and private shortterm debt are substitutes, and the relationship between the supply of STSI and the money premium, stemming from their liquid, short-term, and safe nature. Then, we discuss potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets available to financial market participants.