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What Makes US Government Bonds Safe Assets?

Author

Listed:
  • He, Zhiguo

    (University of Chicago)

  • Krishnamurthy, Arvind

    (Stanford University)

  • Milbradt, Konstantin

    (Northwestern University)

Abstract

U.S. government bonds are considered to be the world's safe store of value, especially during periods of economic turmoil such as the events of 2008. But what makes U.S. government bonds "safe assets?" We highlight coordination among investors, and build a model in which two countries with heterogeneous sizes issue bonds that may be chosen as safe asset. Our model illustrates the benefit of a large absolute debt size as safe asset investors have "nowhere else to go" in equilibrium, and the large country's bonds are chosen as the safe asset. Moreover, the effect becomes stronger in crisis periods.

Suggested Citation

  • He, Zhiguo & Krishnamurthy, Arvind & Milbradt, Konstantin, 2016. "What Makes US Government Bonds Safe Assets?," Research Papers 3421, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3421
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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