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Seeking Safety

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Listed:
  • Toni Ahnert
  • Enrico Perotti

Abstract

The scale of safe assets suggests a structural demand for a safe wealth share beyond transaction and liquidity roles. We study how investors achieve a reference wealth level by combining self-insurance and contingent liquidation of investment. Intermediaries improve upon autarky, insuring investors with poor self-insurance and limiting liquidation. However, delegation creates a conflict in states with residual risk. Demandable debt ensures safety-seeking investors can withdraw to implement a safe outcome, so private safety provision is fragile. Public debt crowds out private credit supply and investment, while deposit insurance crowds them in by reducing liquidation in residual risk states.

Suggested Citation

  • Toni Ahnert & Enrico Perotti, 2018. "Seeking Safety," Staff Working Papers 18-41, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-41
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    References listed on IDEAS

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    Cited by:

    1. Jan Willem van den End, 2019. "Effects of QE on sovereign bond spreads through the safe asset channel," DNB Working Papers 647, Netherlands Central Bank, Research Department.

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    Keywords

    Financial Institutions;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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