NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Optimal Public and Private Provision of Safe Assets

Marina Azzimonti, Pierre Yared

NBER Working Paper No. 24534
Issued in April 2018, Revised in April 2018
NBER Program(s):The Economic Fluctuations and Growth Program, The Public Economics Program

We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt is higher the more severe are financial frictions.

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Document Object Identifier (DOI): 10.3386/w24534

Published: Marina Azzimonti & Pierre Yared, 2019. "The Optimal Public and Private Provision of Safe Assets," Journal of Monetary Economics, . citation courtesy of

 
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