Safe Assets and Financial Fragility

Abstract

How does access to safe assets affect the fragility and lending of financial intermediaries? We develop a global-game model of investor redemptions from money funds that finance corporate borrowers and hold safe assets (assets without liquidation costs). Using the 2013 debt limit and the Federal Reserve's Overnight Reverse Repurchase (ONRRP) facility as a quasi-natural experiment, we provide evidence consistent with the model. Access to safe assets---the ONRRP---attenuates investor redemptions and allows money funds to maintain their lending to corporations. Our results suggest that the public provision of safe assets reduces intermediary fragility and increases lending to the real economy.

Keywords: Money Market Funds, Safe Assets, Global Games, Financial Fragility.

JEL Classification: G01, G23, E58