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Safety traps, liquidity and information-sensitive assets

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  • Michele Loberto

    (Bank of Italy)

Abstract

We investigate the implications of a scarcity of safe assets in a framework in which the safety of an asset is an equilibrium outcome. The intrinsic characteristics and supply of the assets determine their liquidity properties and degree of safeness. The equilibrium can be inefficient even if assets are plentiful and information insensitive. Only a sufficiently broad expansion of a particular class of safe information-insensitive assets can achieve the first-best allocation, while a marginal increase in their supply can be ineffective. We conclude that microfounding assets safety is fundamental to understand the effects and policy implications of safe assets scarcity.

Suggested Citation

  • Michele Loberto, 2019. "Safety traps, liquidity and information-sensitive assets," Temi di discussione (Economic working papers) 1216, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1216_19
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2019/2019-1216/en_tema_1216.pdf
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    References listed on IDEAS

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    Cited by:

    1. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Other Financial Intermediation," Working Papers 19.04, Swiss National Bank, Study Center Gerzensee.
    2. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Financial Intermediation," 2019 Meeting Papers 352, Society for Economic Dynamics.
    3. Chao Gu & Guido Menzio & Randall Wright & Yu Zhu, 2020. "Toxic Assets and Market Freezes," Working Papers 2001, Department of Economics, University of Missouri.

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    More about this item

    Keywords

    safe assets; private information; liquidity; asset prices;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets

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