NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Supply and Demand for Safe Assets

Gary B. Gorton, Guillermo Ordoñez

NBER Working Paper No. 18732
Issued in January 2013, Revised in April 2020
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w18732

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