The Nexus of Safe Asset Shortage, Credit Growth and Financial Instability

30 Pages Posted: 27 Jun 2019

See all articles by Sujin Kim

Sujin Kim

The New Economic Approach Lab

Date Written: June 10, 2019


Does a shortage of safe assets sow the seeds of instability of financial system? This paper empirically explores the hypothesis of safe asset shortage-induced excess credit booms and financial instability. As an alternative step forward from the assumption of growth- or wealth-based demand for safe assets, the study underlines demographic factors as a main determinant of safe asset demand. Based on the long-run trends of aging and government debt, I newly construct a safe asset shortage index. Using the index, the consecutive empirical exercises confirm the positive relationship of safe asset shortage-credit expansion-aggregate risks of financial system. The estimation of the crisis probabilistic model for 17 advanced economies in 1970-2013 presents new evidence that the (high) level of private credit at a time of increasing safe asset shortage is the major predictor of financial crises. The fixed-effect panel analysis results for 18 advanced countries in 1980-2016 also show a significant, positive contribution of safe asset shortage to credit growth. The total effect of the shortage depends positively on securitization growth and negatively on net capital outflows. The latter effect is considerably dominant.

Keywords: safe asset shortage index, demographics, credit, financial crises, financial stability, government debts, capital flows

JEL Classification: JEL: E21, E62, G00, G01, J10

Suggested Citation

Kim, Sujin, The Nexus of Safe Asset Shortage, Credit Growth and Financial Instability (June 10, 2019). Available at SSRN:

Sujin Kim (Contact Author)

The New Economic Approach Lab ( email )

302, Nam-Sejong
Korea, Republic of (South Korea)

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