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Safe Assets

Author

Listed:
  • Robert J Barro
  • Jesús Fernández-Villaverde
  • Oren Levintal
  • Andrew Mollerus

Abstract

This paper investigates the quantity of safe assets. First, we estimate that the average safe-asset ratio (ratio of safe to total assets) in 34 OECD countries was 37% in 2015. Further, we document that this ratio is relatively stable over time. Second, we build a heterogeneous-agent model with rare disasters and risk aversion coefficients that accounts for (i) the average level of the safe-asset ratio; (ii) the stability of this ratio over time; (iii) the observed risk-free rate of around 1.0% per year; and (iv) the empirical unlevered equity premium of about 4.2%. The model also replicates the observed highly concentrated distributions of wealth and equity. Finally, Ricardian equivalence holds in our model: issuing additional government bonds has no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowding-out coefficient for private bonds with respect to public bonds is around −0.5, a value found in empirical studies.

Suggested Citation

  • Robert J Barro & Jesús Fernández-Villaverde & Oren Levintal & Andrew Mollerus, 2022. "Safe Assets," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2075-2100.
    • Handle: RePEc:oup:econjl:v:132:y:2022:i:646:p:2075-2100.
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    File URL: http://hdl.handle.net/10.1093/ej/ueac017
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    Other versions of this item:

    • Fernández-Villaverde, Jesús & Barro, Robert & Levintal, Oren & Mollerus, Andrew, 2017. "Safe Assets," CEPR Discussion Papers 12043, C.E.P.R. Discussion Papers.
    • Robert J. Barro & Jesús Fernández-Villaverde & Oren Levintal & Andrew Mollerus, 2014. "Safe Assets," NBER Working Papers 20652, National Bureau of Economic Research, Inc.
    • Robert Barro & Jesus Fernandez-Villaverde & Oren Levintal & Andrew Mollerus, 2017. "Safe Assets," PIER Working Paper Archive 17-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 10 May 2017.
    • Robert J. Barro, 2014. "Safe Assets," Working Papers 2014-28, Economic Research Institute, Bank of Korea.

    Citations

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    Cited by:

    1. Emmanuel Farhi & Francois Gourio, 2018. "Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 147-250.
    2. Kan Chen & Nathaniel Karp, 2018. "Natural interest rates in the U.S., Canada and Mexico," Working Papers 18/07, BBVA Bank, Economic Research Department.
    3. Yulei Luo & Jun Nie & Eric R Young, 2020. "Ambiguity, Low Risk-Free Rates and Consumption Inequality," The Economic Journal, Royal Economic Society, vol. 130(632), pages 2649-2679.
    4. Tano Santos & Pietro Veronesi, 2016. "Leverage," NBER Working Papers 22905, National Bureau of Economic Research, Inc.
    5. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2019. "The Tail That Keeps the Riskless Rate Low," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 253-283.
    6. Sushant Acharya & Keshav Dogra, 2022. "The Side Effects of Safe Asset Creation," Journal of the European Economic Association, European Economic Association, vol. 20(2), pages 581-625.
    7. Feng Dong & Yi Wen, 2017. "Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis," Working Papers 2017-25, Federal Reserve Bank of St. Louis.
    8. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Other publications TiSEM daabe114-81fa-44fc-aafd-b, Tilburg University, School of Economics and Management.
    9. Guillermo Hausmann-Guil, 2025. "Solving DSGE models with incomplete markets by perturbation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 57, July.
    10. Panageas, Stavros, 2020. "The Implications of Heterogeneity and Inequality for Asset Pricing," Foundations and Trends(R) in Finance, now publishers, vol. 12(3), pages 199-275, November.
    11. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    12. Veronesi, Pietro & Santos, Tano, 2016. "Habits and Leverage," CEPR Discussion Papers 11681, C.E.P.R. Discussion Papers.
    13. Ricardo J Caballero & Emmanuel Farhi, 2018. "The Safety Trap," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 223-274.
    14. Andrew B. Abel, 2015. "Crowding Out in Ricardian Economies," NBER Working Papers 21550, National Bureau of Economic Research, Inc.
    15. 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.
    16. Ly-Dai, Hung, 2014. "Global Imbalances with Safe Assets in Eurozone," MPRA Paper 90238, University Library of Munich, Germany, revised May 2018.
    17. Ly Dai Hung, 2018. "Global Imbalances with Safe Assets in Eurozone," Working Papers hal-01935158, HAL.
    18. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Discussion Paper 2021-020, Tilburg University, Center for Economic Research.
    19. Dan Cao & Wenlan Luo & Guangyu Nie, 2023. "Global GDSGE Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 199-225, December.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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