State of confidence, overborrowing and the macroeconomic stabilization puzzle

In this paper we analyze the yield difference between two on- and off-the-run similar notes to gauge the liquidity premium. We investigate this issue by relating such a differential to several liquidity indicators that we build and examine -to our knowledge for the first time- throughout the entire life of the Italian Government securities. We provide evidence on the differences between the US and the Italian security markets, calculate accurately the joint and the total probability for liquidity shocks and provide a methodology to cope with the resilience of a liquidity shock and its implications in terms of issuance policies