Foreign demand for safety and macroeconomic instability

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

No 19025, CEPR Discussion Papers from Centre for Economic Policy Research

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-codes: E42 E44 E51 F33 F34 G15 (search for similar items in EconPapers)
Date: 2024-04
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Working Paper: Foreign Demand for Safety and Macroeconomic Instability (2024)
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