DEMAND FOR SHORT TERM GOVERNMENT DEBT

SHORT-TERM government securities are by far the major instruments transacted in the money market. The various intermediaries or institutions which make up the demand sectors for these securities have differing uses or reasons for holding them or disposing of them during varying phases or cycles of economic activity. In this study, the demand for short-term government debt is analyzed for three demand sectors: Commercial banks, mutual savings banks, and life insurance companies. Within each of these demand sectors, the analysis of demand is broken into three categories of factors which influence demand. They are: equilibrium factors, disturbance factors, and factors which measure the term structure of yields of government securities of all maturities. The significant factors within each category are determined by least squares stepwise multiple regression procedures using temporal data. Each category of factors represents a stage of regression such that the dependent demand variable in the next category or regression stage is the residual demand that was unexplained by the significant factors in the previous stage. The order in which the regressions are performed is first stage (equilibrium demand), second stage (disturbance demand), and third stage (yield influence demand). Unique to this demand analysis is the development of series of variables which measure the monthly movements in the term structure of yields on government securities over a five year time period of study. These variables which are the parameters for two different functional forms of yield curves are the independent input variables in the third stage of regression in which the influences of yield curve changes on demand is tested. The test is structured in a "Yield Curve Hypothesis Model" which was devised for this study. Results of the study indicate that demand for short-term government securities came about mainly from their uses as highly liquid earning assets held in place of cash during periods of cash excesses; in place of other temporarily unobtainable, more profitable earning assets; and, as a buffer against sudden losses in other earning assets. Given these and some other minor uses of short-term government securities, further changes in demand took place due to changes in the term structure of yields. These changes significantly influenced demand in both the mutual savings bank and life insurance company demand sectors, but were not significant in the commercial bank demand sector. Within the commercial bank demand sector, whose members are primarily holders of short term government debt as opposed to long term government debt, two significant equilibrium variables accounted for 7.12 per cent of total variation explained. These variables are total assets and the Federal Reserve discount rate. Four disturbance variables contributed an additional 49.61 per cent to explained variation. They are free reserves, required reserve ratio, ratio of the bill rate to the discount rate, and monthly seasonal factors. Proxy variables which measured shapes and shifts in yield curves on governments were not statistically significant within this demand sector. Mutual savings banks and life insurance companies are demand sectors whose mem-