Safe Asset Scarcity and Aggregate Demand
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Caballero_Safe asset.pdf
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516.88 KB
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Author(s)
Farhi, Emmanuel
Gourinchas, Pierre-Olivier
Caballero, Ricardo J
Date Issued
May 2016
Journal
American Economic Review
Publisher
American Economic Association
Citation
Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas. “Safe Asset Scarcity and Aggregate Demand†.” American Economic Review 106, no. 5 (May 2016): 513–518. © 2016 American Economic Association
Version
Final published version
Abstract
We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming style environment. Acute safe asset scarcity forces the economy into a "safety trap" recession. In the open economy, safe asset scarcity spreads from one country to the other via capital flows, equalizing interest rates. Acute global safe asset scarcity forces the economy into a global safety trap. The exchange rate becomes indeterminate but plays a crucial role in both the distribution and the magnitude of output adjustment across countries. Policies that increase the net supply of safe assets somewhere are output enhancing everywhere.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/aer.p20161108
