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Safety traps, liquidity and information-sensitive assets
1 : Banca d'Italia
We investigate the implications of safe assets scarcity 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 although 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.
