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The optimal public and private provision of safe assets

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  • Azzimonti, Marina
  • Yared, Pierre

Abstract

We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt is higher the more severe are financial frictions.

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  • Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    • Handle: RePEc:eee:moneco:v:102:y:2019:i:c:p:126-144
    DOI: 10.1016/j.jmoneco.2019.01.012
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    Cited by:

    1. Daniel L. Greenwald & Tim Landvoigt & Stijn Van Nieuwerburgh, 2021. "Financial Fragility with SAM?," Journal of Finance, American Finance Association, vol. 76(2), pages 651-706, April.
    2. George-Marios Angeletos & Fabrice Collard & Harris Dellas, 2016. "Public Debt as Private Liquidity: Optimal Policy," NBER Working Papers 22794, National Bureau of Economic Research, Inc.
    3. Marina Azzimonti & Vincenzo Quadrini, 2018. "International Spillovers and Bailouts," NBER Working Papers 25011, National Bureau of Economic Research, Inc.
    4. Ohnsorge, Franziska & Kose, M. Ayhan & Sugawara, Naotaka, 2020. "Benefits and Costs of Debt: The Dose Makes the Poison," CEPR Discussion Papers 14439, C.E.P.R. Discussion Papers.
    5. Marco Bassetto & Wei Cui, 2020. "A Ramsey Theory of Financial Distortions," Working Papers 775, Federal Reserve Bank of Minneapolis.
    6. Mengus, Eric & Barthélemy, Jean & Plantin, Guillaume, 2021. "The Central Bank, the Treasury, or the Market: Which One Determines the Price Level?," CEPR Discussion Papers 16679, C.E.P.R. Discussion Papers.
    7. Bayer, Christian & Born, Benjamin & Luetticke, Ralph, 2023. "The liquidity channel of fiscal policy," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 86-117.
    8. Kose M. Ayhan & Ohnsorge Franziska & Sugawara Naotaka, 2022. "A Mountain of Debt: Navigating the Legacy of the Pandemic," Journal of Globalization and Development, De Gruyter, vol. 13(2), pages 233-268, December.
    9. Gorton, Gary & Ordoñez, Guillermo, 2022. "The supply and demand for safe assets," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 132-147.
    10. Marina Azzimonti & Vincenzo Quadrini, 2019. "International spillovers and `ex-ante' efficient bailouts," 2019 Meeting Papers 318, Society for Economic Dynamics.
    11. Chien, YiLi & Wen, Yi, 2021. "Time-inconsistent optimal quantity of debt," European Economic Review, Elsevier, vol. 140(C).

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    More about this item

    Keywords

    Optimal taxation; Debt management; Income distribution;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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