Foreign Demand for Safety and Macroeconomic Instability

• Authors: Madalen Castells Jauregui, Dmitry Kuvshinov, Björn Richter and Victoria Vanasco
• BSE Working Paper: 1438 | February 2026
• Keywords: Business cycles, financial stability, Capital flows, safe assets, financial accounts
• JEL codes: E42, E44, E51, F33, F34, G15

Using novel data on sectoral safe asset positions in 21 advanced economies since 1980, we document the central role of the foreign sector in the market for safety and its macroeconomic implications. We show that safe asset holdings have expanded significantly relative to GDP, driven by rising net holdings of the foreign sector and accommodated by in- creased issuance from the financial and public sectors. Furthermore, fluctuations in safe assets are almost exclusively driven by the foreign and financial sectors, with close links between the two. Finally, increases in foreign demand for safety—or its counterpart, the supply by financials—are associated with domestic credit expansions and weaker medium- term output growth, both in raw data and when using FX reserve accumulation in Asian economies as instrument.