Demand for Money, Near-Money, and Treasury Bonds.

The article investigates the liquidity services provided by bank-created money, shadow-bank money (nontransaction financial sector debt), and U.S. Treasury bonds, focusing on their substitutability and liquidity premiums from 1934 to 2016. Using a model where investors derive utility from a liquidity aggregate composed of these assets, the authors estimate key parameters—particularly the elasticity of substitution (denoted by ρ) between bank deposits and Treasury bonds—and find that these assets are imperfect substitutes, with ρ approximately 0.65 rather than 1 as previously suggested. They extend the analysis to include a nested liquidity aggregate incorporating shadow-bank liabilities, finding that nontransaction financial sector debt is a closer substitute for Treasuries than traditional bank deposits, with an elasticity parameter (η) around 0.85. The study also constructs a new broad liquidity aggregate that includes Treasuries and shadow-bank debt, demonstrating that the demand for this aggregate is more stable over time than traditional money demand measures, addressing the "missing money" puzzle post-1980. The findings have implications for monetary policy transmission, particularly quantitative easing, and provide empirical guidance for macroeconomic models involving multiple liquid assets and the coexistence of regulated and shadow banking systems.