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Absence of Safe Assets and Fiscal Crisis

Masaya Sakuragawa; Yukie Sakuragawa

Title:
Absence of Safe Assets and Fiscal Crisis
Author(s):
Sakuragawa, Masaya
Sakuragawa, Yukie
Date:
Type:
Reports
Department(s):
Center on Japanese Economy and Business
Persistent URL:
Series:
Center on Japanese Economy and Business Working Papers
Part Number:
341
Publisher:
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Publisher Location:
New York
Abstract:
This paper provides a fiscal crisis model that explains the low interest rates of Japanese government bonds. The key ingredient is the absence of safe assets in the sense that investors have no access to any asset that hedges fiscal risk. The interest rate is insensitive to any change in fiscal conditions and does not fully reflect the risk premium. This finding explains the low interest rates of Japanese government bonds even though the risk of fiscal default looks fairly high. The poorly-functioning bond market created in this way contributes to the low interest rate followed by a low default probability, and allows the government to sustain its large debt. This finding explains the mechanism under which the low interest rate coexists with Japan’s large outstanding debt. Welfare implications are mixed. The well-functioning bond market does not always contribute to welfare enhancement because the market makes it difficult to sustain the debt. We show the implications for fiscal sustainability of some policies, such as financial market reforms and growth enhancement policies.
Subject(s):
Economics
Business
Item views
1136
Metadata:
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Suggested Citation:
Masaya Sakuragawa, Yukie Sakuragawa, , Absence of Safe Assets and Fiscal Crisis, Columbia University Academic Commons, .

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