Safe Asset Scarcity Research Articles

Quantities and Covered-Interest Parity

Studies of intermediated arbitrage argue that bank balance sheets are an important consideration, yet little evidence exists on banks’ positioning in this context. Using confidential supervisory data (covering $25 trillion in daily notional exposures) we examine banks’ positions in connection with covered-interest parity (CIP) deviations. Exploiting cross-sectional variation in CIP deviations that have largely challenged existing theories, we document three novel forces that drive bases: 1) foreign safe asset scarcity, 2) market power and segmentation of banks specializing in different markets, and 3) concentration of demand. Our findings shed empirical light on the interplay of frictions influencing banks’ provision of dollar funding.

Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy

We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects.

Quantitative Easing and Safe Asset Scarcity: Evidence from International Bond Safety Premia

Through large-scale asset purchases, widely known as quantitative easing (QE), central banks around the world have reduced the available supply of safe assets. We examine the effects of the European Central Bank’s asset purchases in the 2015-2021 period on an international panel of bond safety premia from four highly rated countries: Denmark, Germany, Sweden, and Switzerland. We find statistically significant negative effects for all four countries. This points to a novel and important international spillover channel of QE programs to bond safety premia that operates via changes in the perceived relative scarcity of safe assets across international bond markets.

Safe Asset Scarcity and Re-use in the European Repo Market

Safe Asset Scarcity and Re-use in the European Repo Market

Safe Asset Scarcity and Re-use in the European Repo Market

Safe Asset Scarcity and Re-use in the European Repo Market

What Drives U.S. Treasury Re-use?

<ns3:p>We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.</ns3:p>

Global Imbalances and Policy Wars at the Zero Lower Bound

Abstract This article explores the consequences of extremely low real interest rates in a world with integrated but heterogeneous capital markets, nominal rigidities, and an effective lower bound [a zero lower bound (ZLB) for simplicity]. We establish four main results: (1) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (2) Beggar-thy-neighbour currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (3) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; and (4) When there is a scarcity of safe assets, net issuers of these assets import the recession from abroad.

Quantitative Easing, Safe Asset Scarcity and Bank Lending

The Eurosystem's Public Sector Purchase Programme (PSPP) increased the scarcity of safe assets, which caused significant declines and substantial dispersion in European repo rates. However, banks holding these safe assets benefited from this development: First, using the German security register, this paper shows that scarcity affects bank funding costs, as their collateral supply is determined by their ex ante securities holdings and repo rates. Second, it makes use of the German credit register to show that asset scarcity had real effects: Banks more exposed to asset scarcity increased their credit supply.

Uwarunkowania i wyzwania kreacji safe assets – szczególna rola długu publicznego

Przedmiot badań: Aktywa bezpieczne (safe assets) są definiowane na różne sposoby, w zależ­ności od ich atrybutów i funkcji. Najczęściej przyjmuje się, że są to płynne instrumenty finanso­we, głównie dłużne, które gwarantują inwestorom zachowanie wartości w trakcie niekorzystnych zjawisk gospodarczych. Podkreśla się, że dług publiczny ze względu na jego cechy charaktery­styczne, najlepiej może wypełnić tę funkcję. Jednakże, ze względu na oddziaływanie czynników popytowych i podażowych, w gospodarce światowej powstaje problem niedoboru aktywów bez­piecznych. Możliwość uzupełniania podaży jest ograniczona zdolnością głównego globalnego dostawcy aktywów bezpiecznych – USA do zwiększania skali długu publicznego.
 Cel badawczy: Celem artykułu jest odpowiedź na kluczowe pytanie, jak dostarczać gospodarce globalnej wymaganą ilość aktywów bezpiecznych, zachowując stabilność zadłużenia publiczne­go emitentów oraz wymagany poziom bezpieczeństwa. 1
 Metoda badawcza: Artykuł stanowi syntezę studiów teoretycznych podejmowanych w litera­turze światowej i jednocześnie próbę wprowadzenia do polskiej literatury zakresu pojęciowego związanego z aktywami bezpiecznymi. Rozważania teoretyczne opierają się na założeniu, że dług publiczny jest kluczowym czynnikiem determinującym wielkość ich emisji. W konsekwencji, w artykule wyodrębniono zestaw ekonomicznych i pozaekonomicznych czynników kreacji pu­blicznych aktywów bezpiecznych. Na podstawie analizy opisowej wskaźników makroekonomicznych (fiskalnych) podjęto ocenę zdolności emitentów walut rezerwowych, w tym głównie USA, do dostarczania safe assets.
 Wyniki: Wyniki badań pozwalają wyciągnąć trzy kluczowe wnioski. Po pierwsze, w procesach kreacji safe assets, ze względu na ich specyficzne funkcje i atrybuty, dominującą rolę odgrywa sektor publiczny. Z tego powodu głównymi dostawcami safe assets są kraje emitujące waluty rezerwowe, w szczególności USA, ze względu na ich monopolistyczną pozycję w międzynaro­dowym systemie walutowym. Po drugie, potencjał tych krajów do emisji aktywów bezpiecznych jest ograniczony. Świadczą o tym zarówno rozważania teoretyczne (krzywa Laffera dla safe as­sets, dylemat Triffina), jak i rosnące poziomy zadłużenia publicznego. Po trzecie, dla utrzymania globalnej stabilności finansowej, konieczne jest uzupełnienie puli aktywów bezpiecznych. Poten­cjalnie rolę tę mogłyby odgrywać Chiny i UGiW.

What Drives U.S. Treasury Re-use?

<ns2:p>We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.</ns2:p>

Scarcity of Safe Assets and Global Neutral Interest Rates

We quantitatively evaluate the role of supply and demand of safe assets in determining neutral interest rates. Using an empirical cross-country state-space model, we find that the net supply of sovereign safe assets available to the private sector in secondary markets is an important driver of neutral rates for 11 advanced economies in the period 1970–2018. We also find that the global accumulation of international reserves in sovereign safe assets since the 1990s (the global savings glut) lowered the net supply of these assets and, thus reduced neutral rates by up to 50 basis points in our sample.

What Drives U.S. Treasury Re-Use?

We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier: the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.

Collateral rehypothecation, safe asset scarcity, and unconventional monetary policy

We build a mark-to-market model where commercial banks can enlarge their balance sheets, repledging the available collateral several times to exchange liquidity through the interbank market. In bad times, the fall of risky asset price disrupts the length of the repledging chain due to the increase of the haircut and the decrease of external assets' value. In such a scenario, the central bank can intervene implementing unconventional monetary policies by purchasing a fraction of the banking system's external assets, both safe treasury bonds, and risky asset-backed securities, to inject liquidity. Our results show that a quantitative easing policy that purchases only safe assets is highly ineffective in restoring the intermediation activity to the pre-crisis level due to its inability to sustain the risky asset price and the repledging chain of collateral. Instead, focusing on risky assets only, the monetary authority can sustain risky asset prices, avoiding the freezing of the money market.

From Cash- to Securities-Driven Euro Area Repo Markets: The Role of Financial Stress and Safe Asset Scarcity

Focussing on repo specialness premia, using ISIN-specific transaction-by-transaction data of one-day maturity repos, we document a gradual shift from cash- to securities-driven transactions in euro area repo markets over the period 2010-2018. Compared to earlier studies focussing only on specific sub-periods or market segments we extend, illustrate, and validate evidence on financial frictions that are relevant in driving repo premia: controlling for a comprehensive range of bond-market specific characteristics, we show that repo premia have been systematically affected by fragmentation in the sovereign space, bank funding stress, and safe asset scarcity. These channels exhibit very strong country-specific differences, as also reflected by large discrepancies in country-specific interest rates on General Collateral. To ensure robustness of our empirical findings, we apply panel econometric and data mining approaches in a complementary and mutually informative way. JEL Classification: E52, E44, C33, C38

Safety Traps, Liquidity and Information-Sensitive Assets

We investigate the implications of a scarcity of safe assets in a framework in which the safety of an asset is an equilibrium outcome. The intrinsic characteristics and supply of the assets determine their liquidity properties and degree of safeness. The equilibrium can be inefficient even if assets are plentiful and information insensitive. Only a sufficiently broad expansion of a particular class of safe information-insensitive assets can achieve the first-best allocation, while a marginal increase in their supply can be ineffective. We conclude that microfounding assets safety is fundamental to understand the effects and policy implications of safe assets scarcity.

Government as borrower of first resort

Optimal government bond supply is examined under asymmetric information and safe asset scarcity. Corporations issue junk debt when demand for safe debt is high since uninformed investors then migrate to risky overheated debt markets. Uninformed demand stimulates informed speculation, driving debt prices toward fundamentals, encouraging pooling at high leverage. As borrower of first resort, government can issue bonds, siphoning off uninformed demand for risky corporate debt, reducing wasteful informed speculation. Government bonds eliminate pooling at high leverage or improve risk sharing in such equilibria. Optimal government bond supply is increasing in demand for safe assets and non-monotonic in marginal Q.

Safe Asset Scarcity and Aggregate Demand

We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming style environment. Acute safe asset scarcity forces the economy into a “safety trap” recession. In the open economy, safe asset scarcity spreads from one country to the other via capital flows, equalizing interest rates. Acute global safe asset scarcity forces the economy into a global safety trap. The exchange rate becomes indeterminate but plays a crucial role in both the distribution and the magnitude of output adjustment across countries. Policies that increase the net supply of safe assets somewhere are output enhancing everywhere.

Discussion on 'Scarcity of Safe Assets, Inflation, and the Policy Trap' by Andolfatto and Williamson

This discussion was prepared for the 84th Meeting of the Carnegie-Rochester-NYU Conference Series on Public Policy "Monetary Policy: An Unprecedented Predicament" held on November 14-15, 2014, at Carnegie Mellon University.

Scarcity of Safe Assets, Inflation, and the Policy Trap

We construct a model in which all consolidated government debt is used in transactions, with money being more widely acceptable. When asset market constraints bind, the model can deliver low real interest rates and positive rates of inflation at the zero lower bound. Optimal monetary policy in the face of a financial crisis shock implies a positive nominal interest rate. The model reveals some novel perils of Taylor rules.

Scarcity of safe assets, inflation, and the policy trap

A goal of this paper is to make sense of the seemingly puzzling behavior of interest rates and inflation – and the role of central banks in that behavior – during and after the Great Recession, particularly in the United States. To this end, we construct a model in which government debt plays a key role in exchange, and can bear a liquidity premium. If asset market constraints bind, then there need not be deflation under an indefinite zero interest rate policy (ZIRP). Further, ZIRP may not be optimal under these circumstances. A Taylor-rule central banker could be subject to a ZIRP trap and persistently undershoot target inflation. As well, a liquidity premium on government debt creates additional Taylor rule perils, because of a persistently low real interest rate. We make a case that this is the key policy predicament currently faced by many central banks in the world.