Source #5 — Safe assets: why some public debt
is useful
Caballero, Farhi & Gourinchas (2017), Journal of Economic Perspectives
Full reference (APA):
Caballero, R. J., Farhi, E., & Gourinchas, P.-O. (2017). The Safe Assets Shortage Conundrum.
Journal of Economic Perspectives, 31(3), 29–46. [Link]
Article page: [Link]
Free PDF: [Link]
Type & credibility
Peer-reviewed article in a top policy journal (JEP) by three leading macroeconomists. It is a
standard reference on safe assets and how they affect the whole financial system.
Question (plain words)
What are safe assets, why has the world become short of them, and what does that mean for
interest rates, crises, and policy?
Method & what they do
They explain what a safe asset is (a simple debt claim that keeps its value in bad times).
They show facts: demand for safe assets has grown, while reliable supply comes mainly
from a few advanced governments (for example, US Treasuries).
They discuss why private “safe” assets (like complex securitizations) often fail in crises.
They review policy options to ease the shortage (credible public debt management,
institutional reforms, and other macro ideas).
Key results (no cherry-picking)
The world has a shortage of safe assets. When demand is high and supply is limited, the
price of safety rises and safe interest rates fall.
Credible public debt (from trustworthy governments) plays a special role: it is the
collateral that keeps markets and banks running (repo, payments, liquidity).
If safe assets are too scarce, economies can get stuck in a “safety trap” (very low rates,
weak demand).
Private creation of safe assets is fragile: in stress, many “safe” private assets lose their safe
status.
Policy takeaway: having a credible stock of public safe assets can stabilize finance, lower
funding costs, and support private investment.
How this supports your topic (“How can debt be useful?”)
It gives you a system-level reason why some public debt is good. Even before a government builds
a bridge, high-quality sovereign bonds act as the safe foundation of the financial system. Banks
use them as collateral; markets use them to move cash. With enough safe assets, borrowing costs
fall and productive private debt (for firms and households) becomes easier and safer. So well-
managed public debt can enable useful borrowing across the whole economy.
Limits / cautions
It is a conceptual + facts paper, not one single causal estimate.
It focuses on the macro plumbing; it does not decide how much debt any one country
should issue (that depends on credibility, inflation, exchange rate, and politics).
Where to file it in your dossier
Chapter 6 (Banks) — explain the plumbing: safe collateral → smooth funding → lower
loan rates.
Country comparisons — why places with credible sovereign bonds (e.g., Chile, South
Africa) tend to have deeper credit than places with less credible bonds (e.g., Argentina,
Libya).
Synthesis checklist — under Design & Rules: “Maintain a credible supply of public safe
assets to support market liquidity.”