Safe Assets as Commodity Money
30 Pages Posted: 11 Oct 2015
Date Written: October 8, 2015
This paper presents a model in which safe assets are systemic because they are the medium of exchange for risky assets. Like commodity money, these assets are costly to produce and have some intrinsic value, resulting in (a) non-neutrality and (b) overproduction. Quantitatively, the welfare consequences of these inefficiencies depend on the costs of producing safe assets, which can be inferred from the equilibrium value of the liquidity premium. When the model is calibrated to plausible liquidity premia the resulting inefficiencies are not large.
Keywords: Safe assets, Shadow banking, Liquidity premium, Commodity money, Liquidity crisis
JEL Classification: E41, E44, G12, G23
Suggested Citation: Suggested Citation