Safety Switches: The Macroeconomic Consequences of Time-Varying Asset Safety

Andrea Foschi

No 12567, CESifo Working Paper Series from CESifo

Abstract: I develop a model-based definition of time-varying sovereign bond safety, and apply it empirically by constructing a news-based index, the FLY, that measures global safe-assets demand. The FLY captures flight-to-safety episodes, the savings glut, and natural interest rate declines. Estimated FLY loadings allow the classification of bonds as safe, neutral, or risky. Post-Great-Recession, the global set of safe assets shrank, but US safety increased. I detect regime switches in FLY loadings: positive switches (becoming safe) align with expansions, higher government spending, lower debt, and credit upgrades; negative switches (becoming risky) are associated with contractions, reduced spending, higher debt, and downgrades.

Keywords: safe assets; flight to safety; sovereign debt; convenience yield; fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 E63 F34 F41 F44 G12 G15 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12567

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