The shortage of safe assets in the US investment portfolio: Some international evidence |
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| Affiliation: | 1. Vienna University of Economic and Business, Institute of Macroeconomics, Austria;2. Vienna University of Economic and Business, Institute for International Economics and Development, Austria;1. Department of Economics, College of Business Administration, University of Wisconsin-La Crosse, 1725 State Street, La Crosse, WI 54601, United States;2. EBS Business School, EBS Universität für Wirtschaft und Recht, Gustav-Stresemann-Ring 3, D-65189 Wiesbaden, Germany;1. Department of Automation, China University of Petroleum, Beijing 102249, PR China;2. Department of Automation, Beijing University of Chemical Technology, Beijing 100029, PR China;1. Economics and SIR USC, University Park Los Angeles and NBER, CA 90089-0043, USA;2. School of Economics and Finance, Victoria University of Wellington, PO Box 600 23 Lambton Quay, Wellington, New Zealand;3. Economics and Research Department, Asian Development Bank, Manila, Philippines;4. Lee Kuan Yew School of Public Policy National University of Singapore (NUS), 469C Bukit Timah Rd, Singapore 259772 |
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| Abstract: | This paper develops a Bayesian Global VAR (GVAR) model to track the international transmission dynamics of two stylized shocks, namely a supply and demand shock to US-based safe assets. Our main findings can be summarized as follows. First, we find that (positive) supply-sided shocks lead to pronounced increases in economic activity which spills over to foreign countries. The impact of supply-sided shocks can also be seen for other quantities of interest, most notably equity prices and exchange rates in Europe. Second, a demand-sided shock leads to an appreciation of the US dollar and generally lower yields on US securities, forcing investors to shift their portfolios towards foreign fixed income securities. This yields sizable positive effects on US output, equity prices and a general decrease in financial market volatility. |
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| Keywords: | Safe assets Zero lower bound Treasury bonds Shortage Global VAR C32 E23 E32 |
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