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The safety trap – the financial market and macroeconomic consequences of the scarcity of safe assets

Author

Listed:
  • Dániel Horváth
  • Róbert Szini

    (Magyar Nemzeti Bank)

Abstract

Despite near-zero interest rates set by large central banks and other steps towards monetary easing in recent years, the economic environment has been characterised by low inflation globally and deflationary fears in some regions, while real economic activity has remained moderate. Although symptoms of this phenomenon are similar to that of the liquidity trap, important differences may be identified, which suggests that other factors may be important as well. One of the new approaches to appear in the literature identifies the structural excess demand of safe assets as a background factor that was aggravated by cyclical effects in the crisis. The mechanism of the so-called safety trap is similar to that of the liquidity trap, but it can be observed among safe assets; therefore, it can be considered a special type of liquidity trap. Financial market tensions trigger an economic downturn and a deflationary spiral in both cases, but different types of monetary policy responses may be effective. While forward guidance may be effective in the case of a liquidity trap, certain quantitative easing policies may provide a solution in the case of a safety trap.

Suggested Citation

  • Dániel Horváth & Róbert Szini, 2015. "The safety trap – the financial market and macroeconomic consequences of the scarcity of safe assets," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 14(1), pages 111-138.
    • Handle: RePEc:mnb:finrev:v:14:y:2015:i:1:p:111-138
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    References listed on IDEAS

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    Cited by:

    1. Tibor Tatay & Zsanett Orlovits & Zsuzsanna Novák, 2022. "Inhomogeneous Financial Markets in a Low Interest Rate Environment—A Cluster Analysis of Eurozone Economies," Risks, MDPI, vol. 10(10), pages 1-22, October.
    2. Máté Csiki & Gábor Dávid Kiss, 2018. "Capital Market Contagion in the Stock Markets of Visegrád Countries Based on the Heckman Selection Model," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 17(4), pages 23-52.

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    More about this item

    Keywords

    financial markets; risk-free assets; liquidity trap; monetary policy;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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