Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266110 
Year of Publication: 
2022
Series/Report no.: 
Staff Report No. 1026
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
We model a safe asset market with investors valuing safety, investors valuing liquidity, and constrained dealers. While safety investors and liquidity investors can interact symbiotically with offsetting trades in times of stress, we show that liquidity investors' strategic interaction harbors the potential for selffulfilling fragility. Surprisingly, standard flight to safety in times of stress can have a destabilizing effect and trigger a dash for cash by liquidity investors. This explains how safe asset markets can experience price crashes, as in March 2020. The announcement and execution of policy interventions play important roles for the functioning of safe asset markets.
Subjects: 
safe assets
liquidity shocks
global games
Treasury securities
COVID-19
JEL: 
C7
G01
G1
E4
E5
Document Type: 
Working Paper

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