Safe Assets as Balance Sheet Multipliers

Abstract

We highlight the multiplier role of (public) safe assets by studying a model of a bank’s balance sheet. The bank optimally constructs a portfolio of safe and risky assets and designs its liabilities. Holding costly but adverse-selection-free safe assets multiplies the production of risky assets with information frictions and facilitates the issuance of private safe debts backed by the asset portfolio, expanding the bank’s balance sheet. Safe assets' convenient yields can be decomposed into safety and liquidity components. Quantitative easing operations such as safe for troubled asset swaps improve fiscal capacity of governments and are more liquidity effective.