Safe Assets and Financial Fragility

45 Pages Posted: 9 Oct 2019 Last revised: 20 Apr 2022

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR); Systemic Risk Centre - LSE; Halle Institute for Economic Research

Marco Macchiavelli

Isenberg School of Management

Date Written: October 15, 2021

Abstract

How does the access to safe assets affect the fragility and lending behavior of financial intermediaries? We develop a global-game model of investor redemptions from money market funds that hold safe assets and fund risky corporate borrowers. Using the 2013 U.S. debt limit episode and the Federal Reserve's Overnight Reverse Repurchase (ONRRP) facility as our empirical laboratory, we provide evidence consistent with the model's implications. In particular, access to a safe asset---the ONRRP---attenuates investor redemption incentives and allows money market mutual funds to maintain their lending to corporate borrowers. Overall, our results suggest that the public provision of a safe asset 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

Suggested Citation

Ahnert, Toni and Macchiavelli, Marco, Safe Assets and Financial Fragility (October 15, 2021). Available at SSRN: https://ssrn.com/abstract=3460800 or http://dx.doi.org/10.2139/ssrn.3460800

Toni Ahnert

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Systemic Risk Centre - LSE ( email )

London
United Kingdom

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Marco Macchiavelli (Contact Author)

Isenberg School of Management ( email )

Amherst, MA 01003
United States

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