Working Paper: NBER ID: w18737
Authors: Ricardo J. Caballero; Emmanuel Farhi
Abstract: The global economy has a chronic shortage of safe assets which lies behind many recent macroeconomic imbalances. This paper provides a simple model of the Safe Asset Mechanism (SAM), its recessionary safety traps, and its policy antidotes. Safety traps share many common features with conventional liquidity traps, but also exhibit important differences, in particular with respect to their reaction to policy packages. In general, policy-puts (such as QE1, LTRO, fiscal policy, etc.) that support future bad states of the economy play a central role in the SAM environment, while policy-calls that support the good states of the recovery (e.g., some aspects of forward guidance) are less powerful. Public debt plays a central role in SAM as long as the government has spare fiscal capacity to back safe asset production.
Keywords: safe assets; economic policy; safety traps; public debt; quantitative easing
JEL Codes: E32; E4; E5; E52; E62; E63; F3; F41; G01; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shortage of safe assets (E44) | adverse economic conditions (E66) |
| safe interest rate cannot decrease sufficiently (E43) | recession (E32) |
| lack of safe assets (F65) | economic downturns (F44) |
| public debt issuance (H63) | alleviation of safe asset shortages (E44) |
| policy puts (quantitative easing) (C54) | increase in supply of safe assets (E51) |
| increase in supply of safe assets (E51) | positive effects on output (E23) |
| policy calls (forward guidance) (E60) | limited effectiveness in stimulating economic recovery (E65) |