Safe Assets

This paper investigates the quantity of safe assets. First, we estimate that the average safe-asset ratio (ratio of safe to total assets) in 34 OECD countries was 37% in 2015. Further, we document that this ratio is relatively stable over time. Second, we build a heterogeneous-agent model with rare disasters and risk aversion coefficients that accounts for (i) the average level of the safe-asset ratio; (ii) the stability of this ratio over time; (iii) the observed risk-free rate of around 1.0% per year; and (iv) the empirical unlevered equity premium of about 4.2%. The model also replicates the observed highly concentrated distributions of wealth and equity. Finally, Ricardian equivalence holds in our model: issuing additional government bonds has no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowding-out coefficient for private bonds with respect to public bonds is around -0.5, a value found in empirical studies.