Sectoral Dynamics of Safe Assets in Advanced Economies

• Authors: Madalen Castells Jauregui, Björn Richter, Dmitry Kuvshinov and Victoria Vanasco.
• BSE Working Paper: 1438 | April 24
• Keywords: Business cycles , financial stability , Capital flows , safe assets , financial accounts
• JEL codes: E42, E44, E51, F33, F34, G15

What is the sectoral composition of the market for safety, and does it matter for economic stability? To address these questions, we construct a novel dataset of sectoral safe asset positions in 21 advanced economies since 1980. In almost every country, safe assets have grown considerably relative to GDP, while maintaining a stable “safe-asset share” relative to total financial assets. We find that safe-asset fluctuations are almost exclusively driven by the foreign and financial sectors—who are, respectively, the key marginal buyers and issuers of safe assets—with the real and public sectors playing a muted role. Moreover, increases in safe asset demand by foreigners (raw, and instrumented using emerging- market FX holdings)—or its counterpart, the supply by financials—are associated with expansions in domestic risky credit and lower medium-term output growth. Our results suggest that advanced economies have been increasingly intermediating safety within and across borders, with potentially adverse effects on their economic stability.