The Supply and Demand for Safe Assets

37 Pages Posted: 26 Jan 2013 Last revised: 1 May 2023

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: January 2013

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 mortgagebacked 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.

Suggested Citation

Gorton, Gary B. and Ordoñez, Guillermo, The Supply and Demand for Safe Assets (January 2013). NBER Working Paper No. w18732, Available at SSRN: https://ssrn.com/abstract=2207267

Gary B. Gorton (Contact Author)

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National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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United States

National Bureau of Economic Research (NBER) ( email )

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