EconPapers    
Economics at your fingertips  
 

The Side Effects of Safe Asset Creation

Sushant Acharya () and Keshav Dogra ()

Staff Working Papers from Bank of Canada

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 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 in inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

Keywords: Fiscal policy; Monetary policy implementation (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 G1 H6 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2021-07
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2021/07/swp2021-34.pdf Full text (application/pdf)

Related works:
Journal Article: The Side Effects of Safe Asset Creation (2022) Downloads
Working Paper: The Side Effects of Safe Asset Creation (2020) Downloads
Working Paper: The side effects of safe asset creation (2018) Downloads
Working Paper: The Side Effects of Safe Asset Creation (2017) Downloads
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:bca:bocawp:21-34

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2023-01-25
Handle: RePEc:bca:bocawp:21-34