May 2009

Liquidity Rules
On the surface, the meltdown of the U.S. subprime mortgage market should not have triggered a worldwide financial crisis. Worst-case estimates put subprime mortgage losses at $250 billion—a drop in the bucket compared to the many trillions of dollars worth of financial instruments traded around the globe.

Ricardo J. Caballero

Arvind Krishnamurthy

November 2007

Treasury Debt and Corporate Bond Rates
The authors relate the yield spread between AAA-rated corporate bonds and Treasury securities to the U.S. government debt-to-GDP ratio—that is, the ratio of the face value of publicly held U.S. government debt to U.S. gross domestic product (GDP). They find that the corporate bond spread is high when the stock of government debt is low while the spread is low when the stock of debt is high. The demand for “convenience” provided by Treasury debt depends on this yield spread, and they provide estimates of the elasticity of demand.

Arvind Krishnamurthy

Annette Vissing-Jørgensen