The Supply and Demand for Safe Assets / Gary B. Gorton, Guillermo Ordoñez.

Format:

Book

Author/Creator:

Gorton, Gary B.

Contributor:

National Bureau of Economic Research.

Ordoñez, Guillermo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18732.

NBER working paper series no. w18732

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

Safe assets are demanded to smooth consumption across states (both intertemporally and in cross-section). Some of these assets are supplied publicly (government bonds) and some are created and supplied privately (such as mortgagebacked securities and asset-backed securities). Private assets are created endogenously when the supply of government bonds is low. Private assets are used as collateral and come in heterogeneous quality. Financial fragility is the probability that a large amount of private assets are examined, some are found to be of low quality and then some firms cannot get loans. We characterize the government's optimal supply of government bonds when considering their effects on the creation of private assets and on economy-wide fragility. We show that monetary and macroprudential policies cannot be run in isolation. When there are too many private assets the government should operate a Bond Exchange Facility that exchanges private assets for public safe assets.

Notes:

Print version record

January 2013.