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Safe Assets, Collateral Premium and Sovereign Bond Spreads

By Gabriella Chiesa


This paper analyses the interactions between the financial and the real sector in an environment where liquidity holdings is an input of the credit/investment process. The supply of liquidity is constrained in that income pledgeability limits inside liquidity, and not all sovereign debt is safe/liquid. We derive firms\u2019/banks\u2019 liquid asset portfolios and real investment/credit-lines provision, government bonds\u2019 prices, the associated liquidity/collateral premia and bond spreads, aggregate investment and credit. We provide empirical evidence of the model\u2019s predictions for the Euro-area, and the relevance of a European safe asset for the long run survival of the euro-zon

Topics: Safe assets, Liquidity, Credit, Sovereign debt spreads
Year: 2018
DOI identifier: 10.26350/000518_000017
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