Foreign demand for safety and macroeconomic instability

Madalen Castells-Jauregui, Dmitry Kuvshinov, Björn Richter and Victoria Vanasco

No 3126, Working Paper Series from European Central Bank

Abstract: Using novel data on sectoral safe asset positions in 21 advanced economies since 1980, we document the central role of the foreign sector in the market for safety and its macroeconomic implications. We show that safe asset holdings have expanded significantly relative to GDP, driven by rising net holdings of the foreign sector and accommodated by increased issuance from the financial and public sectors. Furthermore, fluctuations in safe assets are almost exclusively driven by the foreign and financial sectors, with close links between the two. Finally, increases in foreign demand for safety-or its counterpart, the supply by financials-are associated with domestic credit expansions and weaker medium-term output growth, both in raw data and when using FX reserve accumulation in Asian economies as instrument. JEL Classification: E42, E44, E51, F33, F34, G15

Keywords: business cycles; capital flows; financial accounts; financial stability; safe assets (search for similar items in EconPapers)
Date: 2025-09
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253126

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