Safe Assets’ Scarcity, Liquidity and Spreads

Quaderni - Working Paper DSE N° 927

34 Pages Posted: 27 Feb 2014

See all articles by Gabriella Chiesa

Gabriella Chiesa

University of Bologna - Department of Economics

Date Written: February 27, 2014

Abstract

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

Chiesa, Gabriella, Safe Assets’ Scarcity, Liquidity and Spreads (February 27, 2014). Quaderni - Working Paper DSE N° 927, Available at SSRN: https://ssrn.com/abstract=2402143 or http://dx.doi.org/10.2139/ssrn.2402143

Gabriella Chiesa (Contact Author)

University of Bologna - Department of Economics ( email )

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HOME PAGE: http://www.dse.unibo.it/gchiesa/home.htm

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