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Safe Assets

Author

Listed:
  • Barro, Robert J.
  • Fern�ndez-Villaverde, Jes�s
  • Levintal, Oren
  • Mollerus, Andrew

Abstract

A safe asset's real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representative-agent version of this economy, the quantity of safe assets will be nil. With heterogeneity in coefficients of relative risk aversion, safe assets can take the form of private bond issues from low-risk-aversion to high-risk-aversion agents. The model assumes Epstein-Zin/Weil preferences with common values of the intertemporal elasticity of substitution and the rate of time preference. The model achieves stationarity by allowing for random shifts in coefficients of relative risk aversion. We derive the equilibrium values of the ratio of safe to total assets, the shares of each agent in equity ownership and wealth, and the rates of return on safe and risky assets. In a baseline case, the steady-state risk-free rate is 1.0% per year, the unlevered equity premium is 4.2%, and the quantity of safe assets ranges up to 15% of economy-wide assets (comprising the capitalized value of GDP). A disaster shock leads to an extended period in which the share of wealth held by the low-risk-averse agent and the risk-free rate are low but rising, and the ratio of safe to total assets is high but falling. In the baseline model, Ricardian Equivalence holds in that added government bonds have 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 not 0 or -1 but around -0.5, a value found in some existing empirical studies.

Suggested Citation

  • Barro, Robert J. & Fern�ndez-Villaverde, Jes�s & Levintal, Oren & Mollerus, Andrew, 2017. "Safe Assets," CEPR Discussion Papers 12043, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12043
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    • Robert J. Barro & Jesús Fernández-Villaverde & Oren Levintal & Andrew Mollerus, 2014. "Safe Assets," NBER Working Papers 20652, National Bureau of Economic Research, Inc.

    References listed on IDEAS

    as
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    9. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
    10. Robert E. Hall, 2016. "The Role of the Growth of Risk-Averse Wealth in the Decline of the Safe Real Interest Rate," NBER Working Papers 22196, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    2. Dong, Feng & Wen, Yi, 2017. "Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis," Working Papers 2017-25, Federal Reserve Bank of St. Louis, revised 10 Oct 2017.
    3. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2018. "The Tail that Keeps the Riskless Rate Low," NBER Chapters,in: NBER Macroeconomics Annual 2018, volume 33 National Bureau of Economic Research, Inc.
    4. Andrew B. Abel, 2015. "Crowding Out in Ricardian Economies," NBER Working Papers 21550, National Bureau of Economic Research, Inc.
    5. Marina Azzimonti & Pierre Yared, 2018. "The Optimal Public and Private Provision of Safe Assets," NBER Working Papers 24534, National Bureau of Economic Research, Inc.
    6. Kan Chen & Nathaniel Karp, 2018. "Natural interest rates in the U.S., Canada and Mexico," Working Papers 18/07, BBVA Bank, Economic Research Department.
    7. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E0 - Macroeconomics and Monetary Economics - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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