Discussion of “Convenience Yields and Financial Repression”
Payne and Szoke

Francesco Bianchi
Johns Hopkins University
NBER & CEPR

Francesco Bianchi

Convenience Yields and Financial Repression

1/10

SummarySummary
This paper contributes to the literature studying convenience yield and safe assets:
The paper provides a theoretical explanation for the convenience yield based on
financial repression
Financial repression affects convenience yield in a direct and indirect way
The indirect channel is particularly interesting because less mechanical
During bad times, regulation can induce an increase in demand for govt debt, driving up
its price, and making it a good hedge ⇒ larger convenience yield
However, for govt debt to be a safe asset, fiscal responsibility is necessary
Default erodes the value of debt in bad times, reducing its role of hedge, and ultimately
lowering the convenience yield

Francesco Bianchi

Convenience Yields and Financial Repression

2/10

Summary

General comments

I really enjoyed reading this paper
The key mechanisms are very clearly explained and interesting
The paper makes a clear and interesting connection to fiscal policy and shows theimportance of modeling the preference for govt bonds endogenously
I will focus on some modelling assumptions that I find interestingFrancesco Bianchi

Convenience Yields and Financial Repression

3/10

Comments

Comment 1: Is government debt like any other debt?
In the model, ”absent regulation, there is no special role for government debt?”
1

Natural starting point, given the focus on financial regulation

2

But perhaps a strong assumption for countries that issue debt in their own currency?

3

Debt is real in the model

4

Authors talk about explicit and implicit default. Is implicit default due to inflation?

5Are the two types of default equally costly for banks? Fiscal inflation has some benefits
if monetary policy is ineffective.

Paper makes a lot of progress, perhaps role of inflation could be developed in afollow-up paper
This would further strengthen the connection to the literature on monetary/fiscal
policy interaction
Francesco Bianchi

Convenience Yields and Financial Repression

4/10

Comments

Comment 2: Financial Repression and Fiscal Inflation

Fiscal policy follows an exogenous process ⇒ unpleasant monetarist arithmetic
1

In monetary/fiscal policy interaction literature, bad fiscal outcomes lead to inflation

2

In this paper, they lead to financial repression

Quite likely, both channels are at work
Do they reinforce each other?

Francesco Bianchi

Convenience Yields and Financial Repression

5/10

Comments

Fiscal Inflation
Inflation
10
8
6
4
2
0-2-4
1960

Unfunded Transfers Shocks
Other Policy Shocks
Nonpolicy Shocks + Steady State

1970

1980

1990

2000

2010

Unfunded transfers shocks (Bianchi, Faccini, Melosi, QJE 2023):

2020

BEI

1

Accounts for rise of trend inflation in the 1960s-1970s and decline in the 1980s

2Offsets the deflationary bias since early 1990s, post-COVID acceleration
Francesco Bianchi

Convenience Yields and Financial Repression

6/10

Comments

Fiscal Inflation
Inflation1086
420-2-41960

Unfunded Transfers Shocks
Other Policy Shocks
Nonpolicy Shocks + Steady State

1970

1980

1990

2000

2010

Unfunded transfers shocks (Bianchi, Faccini, Melosi, QJE 2023):

2020

BEI

1

Accounts for rise of trend inflation in the 1960s-1970s and decline in the 1980s

2

Offsets the deflationary bias since early 1990s, post-COVID acceleration
Francesco Bianchi

Convenience Yields and Financial Repression

6/10Comments

Financial Repression

Convenience yield (Payne and Szoke):
1

High in the 1960s-1970s and briefly in the early 1980s

2

High again in the post-Millennial period
Francesco Bianchi

Convenience Yields and Financial Repression

7/10

Comments

Financial Repression

Convenience yield (Payne and Szoke):
1

High in the 1960s-1970s and briefly in the early 1980s

2

High again in the post-Millennial period
Francesco Bianchi

Convenience Yields and Financial Repression

7/10

Comments

Comment 3: r < g

The authors results could also be interesting to inform the r < g debate
In models of monetary/fiscal policy interaction, r < g arises if the central bankaccommodates large spending shocks
Here, r < g arises because of financial repression
Key insight: convenience yield is endogenous, and so it is the observed r
1

Lowering the real interest rate requires a certain level of fiscal discipline

2

Additional fiscal space exploitable only to some extent

Francesco Bianchi

Convenience Yields and Financial Repression

8/10

Comments

Comment 4: Bank’s risk aversion

A key role is played by the cost of default potentially sustained by banks
Because of this cost, banks act as if they were more risk averse than households
This is an interesting perspective, but it would be important to understand thebroader implications
There are models in which banks and financial intermediaries are less risk averse
One interpretation: Perhaps banks carry more aggregate risk because of loans

Francesco Bianchi

Convenience Yields and Financial Repression

9/10

Conclusions

Conclusions

A very interesting and innovative paper
Provide credible explanation for convenience yield
Useful to make predictions on its evolution, as opposed to taking it as given
Laboratory to develop the connection between financial repression and fiscal policy
It will be interesting to understand the broader macroeconomic implications

Francesco Bianchi

Convenience Yields and Financial Repression

10/10