Work in progress

Does Treasury supply fuel shadow bank lending? [Draft available upon request]

How does the expansion of Treasury supply reshape financial intermediation by fueling capital and liquidity provision by shadow banks? This paper investigates whether Treasury issuance fuels capital provision by the shadow banking sector. Using local projections with instrumental variables, I document that shadow banks actively sell Treasury holdings to expand lending following a supply shock, while regulated banks curtail credit. To explain this divergence, I develop a quantitative general equilibrium model featuring intermediary heterogeneity and imperfect asset substitutability. The core mechanism is a household portfolio rebalancing channel: as Treasury supply increases and its convenience yield falls, households shift liquidity toward shadow bank liabilities, which are closer substitutes for Treasuries than traditional deposits. While shadow banks use their government bond holdings as a buffer to ”step in” and provide credit, this reallocation increases financial sector leverage. I find that the resulting investment slump and reduced private liquidity provision lead to a welfare loss of approximately one percent. These results suggest that Treasury supply is a primary driver of financial structural change and that intermediary Treasury holdings are critical for macro-financial stability.

Presentations: Symposium of the Society for Nonlinear Dynamics and Econometrics* (2026, Lisbon), New Zealand Finance Meeting (2025, Queenstown), Australasian Finance and Banking Conference (2025, Sydney), EUI-UW conference ”Widening Horizons of Macroeconomic Research” - Poster (2025, Warsaw), Annual Meeting of the Portuguese Economic Journal (2025, Carcavelos), Bonn-Cologne-Frankfurt-Mannheim PhD Conference (2025, Frankfurt), PhD Macro Modeling Seminar (2025, Frankfurt), Theories and Methods in Macroeconomics (2024, Amsterdam), Tinbergen Institute PhD Seminar (2024, Amsterdam), Nova Macro Working Group (2023, Lisbon), and Nova SBE PhD Research Group (2023, Lisbon). (* indicates scheduled)