Safe Assets’ Scarcity, Liquidity and Spreads
Quaderni - Working Paper DSE N° 927
34 Pages Posted: 27 Feb 2014
Date Written: February 27, 2014
This paper constructs a simple general equilibrium model to analyse the interactions between the financial and the real sector in an environment where liquidity holdings is an input of the credit/investment process. The supply of liquidity is constrained in that income pledgeability limits inside liquidity, and not all sovereign debt is safe/liquid. We pin down the determinants of liquidity/collateral premia and bond spreads, and with reference to the eurozone: (i) the implications of the ECB’s policies on liquidity provision and credit, and (ii) the debt management policy that would increase welfare with no need for transfer payments.
Keywords: Safe assets, Liquidity, Credit, Sovereign debt spreads
JEL Classification: E44, H63, G18
Suggested Citation: Suggested Citation