This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. April 2019
  5. A Model of Safe Asset Determination

A Model of Safe Asset Determination

Download Full Text PDF

Abstract

What makes an asset a "safe" asset? We study a model where two countries each issue sovereign bonds to satisfy investors' safe asset demands. The countries differ in the float of their bonds and the fundamental resources available to rollover debts. A sovereign's debt is safer if its fundamentals are strong relative to other possible safe assets, not merely strong on an absolute basis. If demand for safe assets is high, a large float enhances safety through a market depth benefit. If demand for safe assets is low, then large debt size is a negative as rollover risk looms large.

Citation

He, Zhiguo, Arvind Krishnamurthy, and Konstantin Milbradt. 2019. "A Model of Safe Asset Determination." American Economic Review, 109 (4): 1230-62. DOI: 10.1257/aer.20160216

Additional Materials

JEL Classification

  • F34 International Lending and Debt Problems
  • H63 National Debt; Debt Management; Sovereign Debt