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Safe Assets

Author

Listed:
  • Robert J. Barro

    (Department of Economics, Harvard University)

Abstract
A safe asset is one whose real value is insulated from shocks, including declines in GDP associated with rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the specified process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representative-agent version of this economy, the quantity of safe assets will effectively be nil. With heterogeneity in coefficients of relative risk aversion, safe assets may take the form of private bond issues from low-risk-aversion agents to high-risk-aversion agents. I work out the quantity of safe assets, the risk-free interest rate, and the equity premium in a model with Epstein-Zin-Weil preferences, heterogeneous coefficients of relative risk aversion, and log utility (intertemporal elasticity of substitution equal to one). In one example, safe assets are around 140% of annual GDP and 6% of economy-wide assets (comprising the capitalized value of the full GDP), the risk-free rate is 1.0% per year, and the equity premium is 4.2%. In the baseline model, Ricardian equivalence holds. Added (safe) government bonds have no effect on the economy’s net quantity of safe assets or the risk-free rate and crowd out private bonds with a coefficient around -0.5.

Suggested Citation

  • Robert J. Barro, 2014. "Safe Assets," Working Papers 2014-28, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1428
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    Other versions of this item:

    • Robert J Barro & Jesús Fernández-Villaverde & Oren Levintal & Andrew Mollerus, 2022. "Safe Assets," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2075-2100.
    • Robert J. Barro & Jesús Fernández-Villaverde & Oren Levintal & Andrew Mollerus, 2014. "Safe Assets," NBER Working Papers 20652, National Bureau of Economic Research, Inc.
    • Fernández-Villaverde, Jesús & Barro, Robert & Levintal, Oren & Mollerus, Andrew, 2017. "Safe Assets," CEPR Discussion Papers 12043, C.E.P.R. Discussion Papers.
    • Robert Barro & Jesus Fernandez-Villaverde & Oren Levintal & Andrew Mollerus, 2017. "Safe Assets," PIER Working Paper Archive 17-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 10 May 2017.

    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Tano Santos & Pietro Veronesi, 2016. "Leverage," NBER Working Papers 22905, National Bureau of Economic Research, Inc.
    2. Sushant Acharya & Keshav Dogra, 2022. "The Side Effects of Safe Asset Creation," Journal of the European Economic Association, European Economic Association, vol. 20(2), pages 581-625.
    3. Feng Dong & Yi Wen, 2017. "Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis," Working Papers 2017-25, Federal Reserve Bank of St. Louis.
    4. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Other publications TiSEM daabe114-81fa-44fc-aafd-b, Tilburg University, School of Economics and Management.
    5. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2019. "The Tail That Keeps the Riskless Rate Low," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 253-283.
    6. Andrew B. Abel, 2015. "Crowding Out in Ricardian Economies," NBER Working Papers 21550, National Bureau of Economic Research, Inc.
    7. Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    8. Ly-Dai, Hung, 2014. "Global Imbalances with Safe Assets in Eurozone," MPRA Paper 90238, University Library of Munich, Germany, revised May 2018.
    9. Ly Dai Hung, 2018. "Global Imbalances with Safe Assets in Eurozone," Working Papers hal-01935158, HAL.
    10. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Discussion Paper 2021-020, Tilburg University, Center for Economic Research.
    11. Emmanuel Farhi & Francois Gourio, 2018. "Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 147-250.
    12. Ricardo J Caballero & Emmanuel Farhi, 2018. "The Safety Trap," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 223-274.
    13. Kan Chen & Nathaniel Karp, 2018. "Natural interest rates in the U.S., Canada and Mexico," Working Papers 18/07, BBVA Bank, Economic Research Department.
    14. Yulei Luo & Jun Nie & Eric R Young, 2020. "Ambiguity, Low Risk-Free Rates and Consumption Inequality," The Economic Journal, Royal Economic Society, vol. 130(632), pages 2649-2679.
    15. Panageas, Stavros, 2020. "The Implications of Heterogeneity and Inequality for Asset Pricing," Foundations and Trends(R) in Finance, now publishers, vol. 12(3), pages 199-275, November.
    16. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    17. Veronesi, Pietro & Santos, Tano, 2016. "Habits and Leverage," CEPR Discussion Papers 11681, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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