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What Makes US Government Bonds Safe Assets?

Author

Listed:
  • He, Zhiguo

    (University of Chicago)

  • Krishnamurthy, Arvind

    (Stanford University)

  • Milbradt, Konstantin

    (Northwestern University)

Abstract

U.S. government bonds are considered to be the world's safe store of value, especially during periods of economic turmoil such as the events of 2008. But what makes U.S. government bonds "safe assets?" We highlight coordination among investors, and build a model in which two countries with heterogeneous sizes issue bonds that may be chosen as safe asset. Our model illustrates the benefit of a large absolute debt size as safe asset investors have "nowhere else to go" in equilibrium, and the large country's bonds are chosen as the safe asset. Moreover, the effect becomes stronger in crisis periods.

Suggested Citation

  • He, Zhiguo & Krishnamurthy, Arvind & Milbradt, Konstantin, 2016. "What Makes US Government Bonds Safe Assets?," Research Papers 3421, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3421
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    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    3. Ricardo J. Caballero & Arvind Krishnamurthy, 2009. "Global Imbalances and Financial Fragility," American Economic Review, American Economic Association, vol. 99(2), pages 584-588, May.
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    Cited by:

    1. Chase P. Ross, 2022. "The Collateral Premium and Levered Safe-Asset Production," Finance and Economics Discussion Series 2022-046, Board of Governors of the Federal Reserve System (U.S.).
    2. Robert N McCauley, 2019. "Safe assets: made, not just born," BIS Working Papers 769, Bank for International Settlements.
    3. Cortes, Gustavo S. & Gao, George P. & Silva, Felipe B.G. & Song, Zhaogang, 2022. "Unconventional monetary policy and disaster risk: Evidence from the subprime and COVID–19 crises," Journal of International Money and Finance, Elsevier, vol. 122(C).
    4. Ly Dai Hung, 2020. "Public Safe Assets Determination," Global Economic Review, Taylor & Francis Journals, vol. 49(4), pages 350-368, October.
    5. Feng Dong & Yi Wen, 2017. "Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis," Working Papers 2017-25, Federal Reserve Bank of St. Louis.
    6. Habib, Maurizio Michael & Stracca, Livio & Venditti, Fabrizio, 2020. "The fundamentals of safe assets," Journal of International Money and Finance, Elsevier, vol. 102(C).
    7. Ly Dai Hung, 2022. "Safe Assets at Financial Globalization," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-21, October.
    8. Aizenman, Joshua & Cheung, Yin-Wong & Qian, XingWang, 2020. "The currency composition of international reserves, demand for international reserves, and global safe assets," Journal of International Money and Finance, Elsevier, vol. 102(C).
    9. Kadırgan, Can, 2023. "Exchange rate driven balance sheet effect and capital flows to emerging market economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 35-45.
    10. Víctor M. Gómez‐Blanco, 2024. "A safe asset in early modern Castile, 1543–1714," Economic History Review, Economic History Society, vol. 77(1), pages 212-243, February.
    11. Glick, Reuven, 2020. "r* and the global economy," Journal of International Money and Finance, Elsevier, vol. 102(C).
    12. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    13. Dick Bryan & David Harvie & Mike Rafferty & Bruno Tinel, 2020. "Ch 13: The Financialized State," Post-Print halshs-02955815, HAL.
    14. repec:ecb:ecbdps:20174 is not listed on IDEAS
    15. Eichengreen, Barry & Macaire, Camille & Mehl, Arnaud & Monnet, Eric & Naef, Alain, 2022. "Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status?," CEPR Discussion Papers 17498, C.E.P.R. Discussion Papers.
    16. Ly-Dai, Hung, 2018. "Public Safe Assets Determination," MPRA Paper 90237, University Library of Munich, Germany, revised Oct 2018.
    17. Luo, Yuwei & Mei, Dongzhou, 2023. "The shortage of safe assets and China's housing boom," Economic Modelling, Elsevier, vol. 119(C).
    18. Fleckenstein, Matthias & Longstaff, Francis A., 2020. "The US Treasury floating rate note puzzle: Is there a premium for mark-to-market stability?," Journal of Financial Economics, Elsevier, vol. 137(3), pages 637-658.
    19. Dick Bryan & David Harvie & Mike Rafferty & Bruno Tinel, 2020. "Ch 13: The Financialized State," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-02955815, HAL.
    20. Gary B. Gorton, 2016. "The History and Economics of Safe Assets," NBER Working Papers 22210, National Bureau of Economic Research, Inc.
    21. Canhui Hong, 2018. "Flight-to-quality debt crises," 2018 Meeting Papers 166, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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