Safety Traps, Liquidity and Information-Sensitive Assets
51 Pages Posted: 6 Aug 2019
Date Written: April 29, 2019
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.
Keywords: safe assets, private information, liquidity, asset prices
JEL Classification: D8, E4, E5, E6, G1
Suggested Citation: Suggested Citation