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The Public and Private Provision of Safe Assets

Author

Listed:
  • Pierre Yared

    (Columbia University)

  • Marina Azzimonti

    (Stony Brook University)

Abstract
We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt responds positively to an increase in the volatility of idiosyncratic shocks, to a decrease in the cost of default, and to an increase in financial repression.

Suggested Citation

  • Pierre Yared & Marina Azzimonti, 2017. "The Public and Private Provision of Safe Assets," 2017 Meeting Papers 755, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:755
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    References listed on IDEAS

    as
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    Cited by:

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