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A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy

  • Ricardo J. Caballero
  • Emmanuel Farhi

The global economy has a chronic shortage of safe assets which lies behind many recent macroeconomic imbalances. This paper provides a simple model of the Safe Asset Mechanism (SAM), its recessionary safety traps, and its policy antidotes. Safety traps share many common features with conventional liquidity traps, but also exhibit important differences, in particular with respect to their reaction to policy packages. In general, policy-puts (such as QE1, LTRO, fiscal policy, etc.) that support future bad states of the economy play a central role in the SAM environment, while policy-calls that support the good states of the recovery (e.g., some aspects of forward guidance) are less powerful. Public debt plays a central role in SAM as long as the government has spare fiscal capacity to back safe asset production.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18737.

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Date of creation: Jan 2013
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Handle: RePEc:nbr:nberwo:18737
Note: EFG IFM ME
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