IDEAS home Printed from https://ideas.repec.org/a/eee/jjieco/v40y2016icp59-76.html
   My bibliography  Save this article

Absence of safe assets and fiscal crisis

Author

Listed:
  • Sakuragawa, Masaya
  • Sakuragawa, Yukie

Abstract

This paper develops a fiscal crisis model that explains a mechanism under which low interest rates can coexist with Japan's large outstanding debt. The key idea is that when there is a strong home bias in the asset portfolio of domestic bondholders, these investors turn out to have no access to any assets that hedge fiscal risk. This explains why domestic investors do not request a risk premium on government bonds. In this environment, the interest rate and the default probability are low, and the government can sustain its large debt even under adverse fiscal conditions. As the interest rate does not rise fully to reflect the risk premium, the low interest rate is not always a signal of sound fiscal conditions. The welfare implications of financial market reform are mixed. This reform can improve welfare so long as the government can sustain the debt, but at the same time, it makes it difficult to sustain the debt because the interest rate rises. Quantitative easing is effective in lowering the risk premium.

Suggested Citation

  • Sakuragawa, Masaya & Sakuragawa, Yukie, 2016. "Absence of safe assets and fiscal crisis," Journal of the Japanese and International Economies, Elsevier, vol. 40(C), pages 59-76.
    • Handle: RePEc:eee:jjieco:v:40:y:2016:i:c:p:59-76
    DOI: 10.1016/j.jjie.2016.03.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0889158316300053
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jjie.2016.03.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Keiichiro Kobayashi & Kozo Ueda, 2022. "Secular Stagnation and Low Interest Rates under the Fear of a Government Debt Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 779-824, June.
    2. Sakuragawa, Masaya & Sakuragawa, Yukie, 2020. "Government fiscal projection and debt sustainability," Japan and the World Economy, Elsevier, vol. 54(C).
    3. Hideaki Matsuoka, 2022. "Debt Intolerance: Threshold Level and Composition," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(4), pages 894-932, August.
    4. Park, Danbee & Sung, Taeyoon, 2020. "Foreign debt, global liquidity, and fiscal sustainability," Japan and the World Economy, Elsevier, vol. 54(C).

    More about this item

    Keywords

    Fiscal crisis; Safe asset; Risk premium; Sustainability;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jjieco:v:40:y:2016:i:c:p:59-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622903 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.