What Makes US Government Bonds Safe Assets?

Zhiguo He, Arvind Krishnamurthy and Konstantin Milbradt
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Zhiguo He: University of Chicago
Konstantin Milbradt: Northwestern University

Research Papers from Stanford University, Graduate School of Business

Abstract: U.S. government bonds are considered to be the world's safe store of value, especially during periods of economic turmoil such as the events of 2008. But what makes U.S. government bonds "safe assets?" We highlight coordination among investors, and build a model in which two countries with heterogeneous sizes issue bonds that may be chosen as safe asset. Our model illustrates the benefit of a large absolute debt size as safe asset investors have "nowhere else to go" in equilibrium, and the large country's bonds are chosen as the safe asset. Moreover, the effect becomes stronger in crisis periods.

Date: 2016-01
New Economics Papers: this item is included in nep-fmk and nep-ifn
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Related works:
Journal Article: What Makes US Government Bonds Safe Assets? (2016)
Working Paper: What Makes US Government Bonds Safe Assets? (2016)
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