Government as a borrower of first resort

Hennessy, C and Chemla, G (2016) Government as a borrower of first resort. Journal of Monetary Economics, 84. pp. 1-16. ISSN 0304-3932 OPEN ACCESS


Optimal government bond supply is examined under asymmetric information and safe asset scarcity. Corporations issue junk debt when demand for safe debt is high since uninformed investors then migrate to risky overheated debt markets. Uninformed demand stimulates informed speculation, driving debt prices toward fundamentals, encouraging pooling at high leverage. As borrower of first resort, government can issue bonds, siphoning off uninformed demand for risky corporate debt, reducing wasteful informed speculation. Government bonds eliminate pooling at high leverage or improve risk sharing in such equilibria. Optimal government bond supply is increasing in demand for safe assets and non-monotonic in marginal Q.

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Item Type: Article
Subject Areas: Finance
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© 2016 Elsevier B V

Date Deposited: 23 Feb 2017 14:07
Date of first compliant deposit: 20 Sep 2019
Subjects: Investment appraisal
Government borrowing
Last Modified: 30 May 2024 02:00

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