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

53 Pages Posted: 26 Jan 2013 Last revised: 13 Mar 2023

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Emmanuel Farhi

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

Date Written: January 2013

Abstract

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.

Suggested Citation

Caballero, Ricardo J. and Farhi, Emmanuel, A Model of the Safe Asset Mechanism (Sam): Safety Traps and Economic Policy (January 2013). NBER Working Paper No. w18737, Available at SSRN: https://ssrn.com/abstract=2207272

Ricardo J. Caballero (Contact Author)

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Emmanuel Farhi

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