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Safety Switches: The Macroeconomic Consequences of Time-Varying Asset Safety

Author

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  • Andrea Foschi

Abstract

I develop a model-based definition of time-varying sovereign bond safety, and apply it empirically by constructing a news-based index, the FLY, that measures global safe-assets demand. The FLY captures flight-to-safety episodes, the savings glut, and natural interest rate declines. Estimated FLY loadings allow the classification of bonds as safe, neutral, or risky. Post-Great-Recession, the global set of safe assets shrank, but US safety increased. I detect regime switches in FLY loadings: positive switches (becoming safe) align with expansions, higher government spending, lower debt, and credit upgrades; negative switches (becoming risky) are associated with contractions, reduced spending, higher debt, and downgrades.

Suggested Citation

  • Andrea Foschi, 2026. "Safety Switches: The Macroeconomic Consequences of Time-Varying Asset Safety," CESifo Working Paper Series 12567, CESifo.
    • Handle: RePEc:ces:ceswps:_12567
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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