NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Safety Trap

Ricardo J. Caballero, Emmanuel Farhi

NBER Working Paper No. 19927
Issued in February 2014
NBER Program(s):   AP   ME

In this paper we provide a model of the macroeconomic implications of safe asset shortages. In particular, we discuss the emergence of a deflationary safety trap equilibrium with endogenous risk premia. It is an acute form of a liquidity trap, in which the shortage of a specific form of assets, safe assets, as opposed to a general shortage of assets, is the fundamental driving force. At the ZLB, our model has a Keynesian cross representation, in which net safe asset supply plays the role of an aggregate demand shifter. Essentially, safety traps correspond to liquidity traps in which the emergence of an endogenous risk premium significantly alters the connection between macroeconomic policy and economic activity. “Helicopter drops” of money, safe public debt issuances, swaps of private risky assets for safe public debt, or increases in the inflation target, stimulate aggregate demand and output, while forward guidance is less effective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets.

download in pdf format
   (666 K)

email paper

This paper was revised on January 20, 2017

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19927

Users who downloaded this paper also downloaded* these:
Caballero and Farhi w18737 A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy
Fernald w20248 Productivity and Potential Output Before, During, and After the Great Recession
Eggertsson and Mehrotra w20574 A Model of Secular Stagnation
Gorton and Ordoñez w18732 The Supply and Demand for Safe Assets
Hayashi and Koeda w19938 Exiting from QE
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us