Safe Assets

51 Pages Posted: 15 May 2017

See all articles by Robert J. Barro

Robert J. Barro

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

Jesús Fernández-Villaverde

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

Oren Levintal

Interdisciplinary Center (IDC) Herzliyah

Andrew Mollerus

Harvard University

Multiple version iconThere are 4 versions of this paper

Date Written: May 2017

Abstract

A safe asset's real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representative-agent version of this economy, the quantity of safe assets will be nil. With heterogeneity in coefficients of relative risk aversion, safe assets can take the form of private bond issues from low-risk-aversion to high-risk-aversion agents. The model assumes Epstein-Zin/Weil preferences with common values of the intertemporal elasticity of substitution and the rate of time preference. The model achieves stationarity by allowing for random shifts in coefficients of relative risk aversion. We derive the equilibrium values of the ratio of safe to total assets, the shares of each agent in equity ownership and wealth, and the rates of return on safe and risky assets. In a baseline case, the steady-state risk-free rate is 1.0% per year, the unlevered equity premium is 4.2%, and the quantity of safe assets ranges up to 15% of economy-wide assets (comprising the capitalized value of GDP). A disaster shock leads to an extended period in which the share of wealth held by the low-risk-averse agent and the risk-free rate are low but rising, and the ratio of safe to total assets is high but falling. In the baseline model, Ricardian Equivalence holds in that added government bonds have no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowding-out coefficient for private bonds with respect to public bonds is not 0 or -1 but around -0.5, a value found in some existing empirical studies.

Suggested Citation

Barro, Robert J. and Fernández-Villaverde, Jesús and Levintal, Oren and Mollerus, Andrew, Safe Assets (May 2017). CEPR Discussion Paper No. DP12043. Available at SSRN: https://ssrn.com/abstract=2968384

Robert J. Barro (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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National Bureau of Economic Research (NBER)

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Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
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Philadelphia, PA 19104
United States
215-898-1504 (Phone)
215-573-2057 (Fax)

National Bureau of Economic Research (NBER)

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United States

Oren Levintal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Andrew Mollerus

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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