The Safe Asset Shortage and the Low Inflation of 2010-2019: A Money Demand View
33 Pages Posted: 1 Mar 2022
Date Written: December 23, 2021
A low-inflation mystery emerged during the 2010-2019 period as the Federal Reserve struggled to hit its two percent inflation target. This paper presents theoretical results and empirical evidence that points to the safe asset shortage as a key reason for the low inflation during this time. Specifically, the paper shows that the safe asset shortage was part of a broader excess money demand phenomenon that raised the real demand for safe assets, lowered their yields and velocity, and created disinflationary pressures across many advanced economies.
Keywords: Federal Reserve, low-inflation mystery, safe asset shortage, excess money demand
JEL Classification: E31, E41, E43, E52, E62
Suggested Citation: Suggested Citation