The Safety Trap
Name
The safety trap.pdf
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1.03 MB
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Author(s)
Caballero, Ricardo J
Farhi, Emmanuel
Date Issued
February 2017
Journal
The Review of Economic Studies
Publisher
Oxford University Press (OUP)
Citation
Caballero, Ricardo J., and Farhi, Emmanuel. “The Safety Trap.” The Review of Economic Studies 85, 1 (February 2017): 223–274 © 2017 The Author
Version
Original manuscript
Abstract
In this article, we provide a model of the macroeconomic implications of safe asset shortages. In particular, we discuss the emergence of a deflationary safety trap equilibrium with endogenous risk premia. It is an acute form of a liquidity trap, in which the shortage of a specific form of assets, safe assets, as opposed to a general shortage of assets, is the fundamental driving force. At the Zero Lower Bound, our model has a Keynesian cross representation, in which net safe asset supply plays the role of an aggregate demand shifter. Essentially, safety traps correspond to liquidity traps in which the emergence of an endogenous risk premium significantly alters the connection between macroeconomic policy and economic activity. "Helicopter drops" of money, safe public debt issuances, swaps of private risky assets for safe public debt, or increases in the inflation target, stimulate aggregate demand and output, while forward guidance is less effective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1093/RESTUD/RDX013
