DP19025 Sectoral dynamics of safe assets in advanced economies
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.
