The Supply and Demand for Safe Assets

35 Pages Posted: 19 Jan 2013 Last revised: 12 Aug 2021

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2021

Abstract

Safe assets are demanded to smooth consumption across states (both intertemporally
and in cross-section). Some of these assets are supplied publicly (government
bonds) and some are created and supplied privately (such as mortgage-backed
securities and asset-backed securities). Private assets are created endogenously
when the supply of government bonds is low. Private assets are used as
collateral and come in heterogeneous quality. Financial fragility is the probability
that a large amount of private assets are examined, some are found to be of
low quality and then some firms cannot get loans. We characterize the government’s
optimal supply of government bonds when considering their effects on
the creation of private assets and on economy-wide fragility. We show that monetary
and macroprudential policies cannot be run in isolation. When there are too
many private assets the government should operate a Bond Exchange Facility that
exchanges private assets for public safe assets.

Keywords: safe assets, monetary policy, financial crises

JEL Classification: E3, E32, E40, E51

Suggested Citation

Gorton, Gary B. and Ordoñez, Guillermo, The Supply and Demand for Safe Assets (July 27, 2021). Available at SSRN: https://ssrn.com/abstract=2202237 or http://dx.doi.org/10.2139/ssrn.2202237

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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