Measuring the monetary services of US treasury securities

Abstract

I exploit the imperfect substitutability of US Treasury securities to measure the monetary service flows (e.g. liquidity and safety) they provide and explore their role in fiscal capacity, inflation, and interest rates. Utilizing a non-parametric index, this study quantifies the service flows from these securities, highlighting their critical role beyond traditional debt instruments. The data suggest that, while the stock of Treasury debt is inflationary, the monetary service flows they provide are disinflationary. Additionally, these monetary services put downward pressure on interest rates in the immediate and longer-term, consistent with the idea of a convenience yield. This research contributes to our understanding of Treasury securities and the impact of fiscal debt on the economy, particularly under various economic conditions. It offers insights for policymakers and market participants, especially as we continue to test the limits of fiscal and monetary policy.