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 important ingredients for there to be a role for policy: the extent to which public and private short-term 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.
Stein, Jeremy C. 2016. “Incomplete Contracts and the Role of Small Firms.” The Impact of Incomplete Contracts on Economics, edited by Philippe Aghion, Mathias Dewatripont, Patrick Legros, and Luigi Zinagales, 1st ed., 166-171. New York: Oxford University Press.