In conclusion, the demand side of this market is a key factor in determining fiscal capacity, inflation, interest rates, etc. It turns out that the monetary service flows of USTs are disinflationary, potentially explaining the varying inflation dynamics re: 2010s vs 2020s.

Lastly, to get a sense of just how big this effect can be, I run a counterfactual to see where inflation would have been without the surge in monetary service flows during the Euro-zone crisis. I find that inflation would have been as much as 400bps higher at times.

To test this theory, I estimate the impact of these monetary service flows and the pure stock of US Treasury debt on inflation and rates. I find that the stock of debt is inflationary, while the monetary service flows are disinflationary.

(Rows denote interest rate considered)

I then show that the value of these monetary service flows add directly to fiscal capacity. This was never more prevalent than during the Euro-debt crisis, when the value of USTs rose 428% from 2007-2014.

Total Monetary Value of USTs

To prove this claim, I consider multiple events. For instance, Menand and Younger (2023) describe the '08Q4 reduction in market intermediation as broker-dealers were reorganized under bank holding companies. The added regulations resulted in a level-shift in T-bill liquidity.

In this paper, I exploit these differences to measure the monetary services flows (liquidity, safety, etc.) of US Treasuries. This involves the derivation of a statistical index number similar to those used in Divisia monetary aggregates.

Monetary Service Flows of US Treasuries

Like every other market, there is a supply and a demand side to US Treasuries. Iteration of the gov’t budget constraint gives you the standard supply side view. Aggregation over individual household bond valuations, though, yields a very different view of the market.

While I’m here, let’s see what #EconSky can do.

Any recommendations for a good outlet for this manuscript?

Niche topic, I know. It’s has been getting mauled by editors and referees wanting to cram it into their field. Just looking for a place that will give it a fair shake.