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The Safety Trap
October 7, 2015Macro, Trade, and Finance Seminar Series

Speaker: Emmanuel Farhi is a Professor of Economics at Harvard University. More »

Abstract: In this paper we provide a model of the macroeconomic consequences of a shortage of safe assets. In particular, we discuss the emergence of a deflationary safety trap equilibrium which is an acute form of a liquidity trap. In this context, issuing public debt, swapping private risky assets for public debt, or increasing the inflation target, stimulate aggregate demand and output, while forward guidance is ineffective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets. When we endogenize the private securitization capacity, we show that in a safety trap there is a securitization externality that leads to underprovision of safe assets.

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*This is a joint event with IMF.

Last Updated: Oct 05, 2015

The Macro, Trade, and Finance Seminar Series is a weekly series hosted by the World Bank's research department. The series invites leading researchers from the fields of macroeconomics, growth, trade, international integration, and finance to present the results of their most recent research in a seminar format. The full list of seminars can be viewed here.

Last Updated: Jul 27, 2015

Event Details
  • Date: October 7, 2015
  • Location: IMF HQ1 10-713
  • Time: 12:00 - 1:30 PM
  • CONTACT: Shweta Mesipam
  • smesipam@worldbank.org

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