The Optimal Public and Private Provision of Safe Assets

45 Pages Posted: 23 Apr 2018 Last revised: 16 Jul 2023

See all articles by Marina Azzimonti

Marina Azzimonti

SUNY Stony Brook - Department of Economics; National Bureau of Economic Research (NBER)

Pierre Yared

Columbia University - Columbia Business School, Finance

Date Written: April 2018

Abstract

We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt is higher the more severe are financial frictions.

Suggested Citation

Azzimonti, Marina and Yared, Pierre, The Optimal Public and Private Provision of Safe Assets (April 2018). NBER Working Paper No. w24534, Available at SSRN: https://ssrn.com/abstract=3167048

Marina Azzimonti (Contact Author)

SUNY Stony Brook - Department of Economics ( email )

NY 11733-4384
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre Yared

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
Uris Hall
New York, NY 10027
United States

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