The Side Effects of Safe Asset Creation

Sushant Acharya and Keshav Dogra

Journal of the European Economic Association, 2022, vol. 20, issue 2, 581-625

Abstract: We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the zero lower bound (ZLB) to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1093/jeea/jvab029 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Side Effects of Safe Asset Creation (2021)
Working Paper: The Side Effects of Safe Asset Creation (2020)
Working Paper: The side effects of safe asset creation (2018)
Working Paper: The Side Effects of Safe Asset Creation (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:20:y:2022:i:2:p:581-625.

Access Statistics for this article

Journal of the European Economic Association is currently edited by Romain Wacziarg

More articles in Journal of the European Economic Association from European Economic Association
Bibliographic data for series maintained by Oxford University Press ().