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Safe Asset Scarcity and Aggregate Demand

Ricardo Caballero (), Emmanuel Farhi and Pierre-Olivier Gourinchas

No 22044, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming 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.

JEL-codes: E0 F3 F4 G1 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-mac and nep-opm
Note: EFG IFM ME
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Citations: View citations in EconPapers (124)

Published as Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2016. "Safe Asset Scarcity and Aggregate Demand," American Economic Review, vol 106(5), pages 513-518.

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