Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
The Safe Assets Shortage Conundrum
Journal of Economic Perspectives
vol. 31,
no. 3, Summer 2017
(pp. 29–46)
(Complimentary)
Abstract
A safe asset is a simple debt instrument that is expected to preserve its value during adverse systemic events. The supply of safe assets, private and public, has historically been concentrated in a small number of advanced economies, most prominently the United States. Over the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world's growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. The signature of this growing shortage is a steady increase in the price of safe assets; equivalently, global safe interest rates must decline, as has been the case since the 1980s. The early literature, brought to light by Ben Bernanke's famous "savings glut" speech of 2005, focused on a general shortage of assets without isolating its safe asset component. The distinction, however, has become increasingly important over time, particularly in the aftermath of the subprime mortgage crisis and its sequels. We begin by describing the main facts and macroeconomic implications of safe asset shortages. Faced with such a structural conundrum, what are the likely short- to medium-term escape valves? We analyze four of them, each with its own macroeconomic and financial trade-offs.Citation
Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas. 2017. "The Safe Assets Shortage Conundrum." Journal of Economic Perspectives, 31 (3): 29–46. DOI: 10.1257/jep.31.3.29Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E42 Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- G20 Financial Institutions and Services: General
- H63 National Debt; Debt Management; Sovereign Debt
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