Safe assets constitute an essential component of the contemporary, international financial system and are vital to its stability. As they are perceived as risk-free assets, they are a special type of financial instrument. Although the vast majority of safe assets are issued by governments, due to the increasing interdependence of economies, resulting from the liberalization of capital flows, financial openness, and the ineffectiveness of the international monetary system, issues relating to their significance, creation, and allocation are global.
This book combines theoretical threads by systematizing the concept and characteristics of safe assets against the background of alternative financial instruments with empirical analyses that present trends in shaping demand, supply, price conditions, and various interdependencies in the financial markets. It shows the position and role of safe assets in the global financial sector, in the context of ongoing challenges, such as the evolution of forms of money and the processes of currency competition, the outbreak of financial and economic crises, the accumulation of foreign exchange reserves, financial innovations, the scale of securitization and monetary integration. Although safe assets are not a new category of financial assets, they are inherently connected with the evolution of money. Thus, the book examines the determinants of their creation, motives of holding, and the consequences of a shortage – all within the changing nature of the international financial system. Historical, political, and institutional backgrounds are taken into account.
The book will appeal to researchers, scholars and advanced students of macroeconomics, international finance and economics, investment analysis, financial economics and econometrics.
Introduction
Chapter 1 Concept, definitions and functions of safe assets. 3
1.1 The overall characteristics of a safe asset 3
1.1.1 Definitions, key features and functions. 3
1.1.2 The attributes of a safe asset 6
1.1.3 Safe assets as a financial instrument and money. 9
1.2 Safe assets versus safe-haven assets. 13
1.2.1 The characteristics of safe havens. 13
1.2.1.1 Gold as a safe haven. 16
1.2.1.2 Safe-haven currencies. 22
1.2.1.3. Other categories of safe havens. 25
1.2.2 Safe-haven assets and asset pricing theory. 27
References. 33
Chapter 2 The supply of safe assets 2
2.1 Determining safe asset supply in an international context 2
2.1.1 Global versus regional providers of safe assets. 2
2.1.2 The exorbitant privilege concept 5
2.1.3 Characteristics of a global safe asset provider. 8
2.2 The structure of the supply of safe assets. 10
2.2.1 Safe asset provision from a historical perspective. 11
2.2.2 Contemporary tendencies in the supply of safe assets. 15
2.3 The role of debt in safe asset creation. 26
2.3.1 Public versus private debt in the provision of safe assets. 27
2.3.2 The special role of public debt as a source of safe asset provision. 34
Chapter 3 The demand for safe assets 2
3.1 Demand for safety. 2
3.1.1 Commercial banks’ demand for safe assets. 3
3.1.2 Motives behind holding safe assets. 8
3.2 Central banks’ demand for safe assets. 13
3.2.1 Foreign exchange reserves in the portfolios of central banks. 13
3.2.2 Gold in central banks’ portfolios. 17
3.3 Sovereign wealth funds’ demand for safe assets. 33
3.4 Other market participants’ demand for safe assets. 39
3.5 The role of the foreign sector in the ownership of domestic safe assets – the case of a global provider (USA) 44
Chapter 4 Safe asset shortages and the implications for financial stability. In search of new sources of supply 3
4.1 Financial stability and its link with the safe assets market 3
4.2 Imbalances in the demand and supply of safe assets 7
4.2.1 Causes of the demand-supply mismatch of safe assets. 7
4.2.2 Consequences of the demand-supply mismatch for financial stability. 10
4.3 The evolution of public debt levels of safe asset supplier countries 14
4.4 Mechanisms of safe asset creation and the stability of the international monetary system 20
4.5 Alternative sources of safe asset supply 26
4.6 The EMU 29
4.6.1 Fiscal frameworks within the EMU and its evolution. 29
4.6.2 A common safe asset for the euro area. An overview of proposals. 37
4.6.3 The role of supranational debt in safe assets creation. The case of EU.. 43
4.7 The role of EMEs in producing safe assets 46
4.7.1 The rising role of EMEs in the global economy. 46
4.7.2 China. 49
4.7.3 India. 59
4.8 Evolution of the forms of money and the supply of safe assets 61
Conclusion
Glossary
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