On 22 November 2023, Annette Vissing-Jørgensen (Senior Adviser at the Federal Reserve Board) delivered the Sixteenth Paolo Baffi Lecture. Professor Vissing-Jørgensen discussed the centrality of convenience yields in the monetary system and their role in shaping the interactions between central banks and financial markets. Certain financial assets possess liquidity and safety features that make them similar to money, allowing their issuers to issue them at lower yields than private securities; this yield differential represents a 'convenience yield'. Central bank reserves and government bonds, two important examples of assets that carry a convenience yield, played a key role in the financial system after the global financial crisis and the advent of unconventional monetary policies.
Starting from a stylized characterization of a a central bank's balance sheet, professor Vissing- Jørgensen argued that purchases of government bonds by the monetary authority have a twofold effect. On the one hand, they allow the central bank to increase reserves, and on the other hand, they reduce the amount of government securities outstanding available to the public. The overall impact on convenience yields and on the liquidity available to financial intermediaries and private investors is ambiguous and depends on the composition as well as the size of the portfolio held by the central bank. The relative availability of bank reserves and government securities is therefore one of the factors that monetary authorities might consider when assessing the size of their balance sheet.
