« The Unemployment Problem is Cyclical | Main | Video: Chrystia Freeland Interviews Larry Summers »

Monday, January 28, 2013

Gorton and Ordonez: The Supply and Demand for Safe Assets

I need to read this:

The Supply and Demand for Safe Assets, by Gary Gorton and Guillermo Ordonez, January 2013, NBER [open link]: Abstract There is a demand for safe assets, either government bonds or private substitutes, for use as collateral. Government bonds are safe assets, given the governments’ power to tax, but their supply is driven by fiscal considerations, and does not necessarily meet the private demand for safe assets. Unlike the government, the private sector cannot produce riskless collateral. When the private sector reaches its limit (the quality of private collateral), government bonds are net wealth, up to the governments own limits (taxation capacity). The economy is fragile to the extent that privately-produced safe assets are relied upon. In a crisis, government bonds can replace private assets that do not sustain borrowing anymore, raising welfare.

    Posted by on Monday, January 28, 2013 at 10:43 AM in Academic Papers, Economics, Financial System | Permalink  Comments (29)



    Feed You can follow this conversation by subscribing to the comment feed for this post.