TY - JOUR
T1 - A model of safe asset determination
AU - He, Zhiguo
AU - Krishnamurthy, Arvind
AU - Milbradt, Konstantin
N1 - Publisher Copyright:
© 2019 American Economic Association. All Rights Reserved.
PY - 2019/4
Y1 - 2019/4
N2 - What makes an asset a "safe" asset? We study a model where two countries each issue sovereign bonds to satisfy investors' safe asset demands. The countries differ in the float of their bonds and the fundamental resources available to rollover debts. A sovereign's debt is safer if its fundamentals are strong relative to other possible safe assets, not merely strong on an absolute basis. If demand for safe assets is high, a large float enhances safety through a market depth benefit. If demand for safe assets is low, then large debt size is a negative as rollover risk looms large.
AB - What makes an asset a "safe" asset? We study a model where two countries each issue sovereign bonds to satisfy investors' safe asset demands. The countries differ in the float of their bonds and the fundamental resources available to rollover debts. A sovereign's debt is safer if its fundamentals are strong relative to other possible safe assets, not merely strong on an absolute basis. If demand for safe assets is high, a large float enhances safety through a market depth benefit. If demand for safe assets is low, then large debt size is a negative as rollover risk looms large.
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U2 - 10.1257/aer.20160216
DO - 10.1257/aer.20160216
M3 - Article
AN - SCOPUS:85063737191
SN - 0002-8282
VL - 109
SP - 1230
EP - 1262
JO - American Economic Review
JF - American Economic Review
IS - 4
ER -