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The Supply and Demand for Safe Assets

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  • Gary B. Gorton
  • Guillermo Ordoñez

Abstract

There is a demand for safe assets, either government bonds or private substitutes, for use as collateral. Government bonds are safe assets, given the government's power to tax, but their supply is driven by fiscal considerations, and does not necessarily meet the private demand for safe assets. Unlike the government, the private sector cannot produce riskless collateral. When the private sector reaches its limit (the quality of private collateral), government bonds are net wealth, up to the government’s own limits (taxation capacity). The economy is fragile to the extent that privately-produced safe assets are relied upon. In a crisis, government bonds can replace private assets that do not sustain borrowing anymore, raising welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18732.

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Date of creation: Jan 2013
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Handle: RePEc:nbr:nberwo:18732

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  1. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  3. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
  4. Warren B. Hrung & Jason S. Seligman, 2011. "Responses to the financial crisis, treasury debt, and the impact on short-term money markets," Staff Reports, Federal Reserve Bank of New York 481, Federal Reserve Bank of New York.
  5. Bohn, Henning, 1992. "Endogenous Government Spending and Ricardian Equivalence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(412), pages 588-97, May.
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Cited by:
  1. Ricardo J. Caballero & Emmanuel Farhi, 2013. "A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy," NBER Working Papers 18737, National Bureau of Economic Research, Inc.
  2. Oliver Hart & Luigi Zingales, 2014. "Banks Are Where The Liquidity Is," NBER Working Papers 20207, National Bureau of Economic Research, Inc.

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