Abstract
A number of researchers have claimed that the international monetary and financial system faces a Triffin dilemma in a new fiscal form. In particular, there is said to be a dilemma between satisfying the world’s demand for safe assets and maintaining the solvency of the issuer of such safe assets. On one horn of the dilemma, global deflation threatens if highly creditworthy sovereigns like the U.S. Treasury do not satisfy emerging market demand. On the other horn, a loss of creditworthiness of the issuer threatens as its government debt to gross domestic product (GDP) ratio rises to satisfy fast-growing global demand. This article suggests that the analogy drawn with the original Triffin dilemma is not tight since the safe asset dilemma does not have a clear cross-over point into instability. This paper casts empirical doubt on the claim that such a dilemma exists. On the demand side, emerging market central banks have actually turned to selling safe assets in the last several years, as against forecasts for an ongoing precautionary accumulation. U.S. Treasury yields have actually risen above those on generic private instruments, the opposite of the predicted widening spread of risky over safe yields. On the supply side, a substantial fraction of U.S. dollar reserve assets is invested in instruments other than U.S. Treasury securities. Reserve managers find safe assets among obligations issued by supranationals, national agencies and even large banks, which enjoy varying degrees of governmental support. Thus, demand for safe assets looks less secular than cyclical and the supply of safe dollar assets does not depend solely on U.S. fiscal deficits.
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Notes
See Carlson et al. (2016) for work on safe assets in the U.S. economy.
Recent observations of negative government bond yields make the safety trap less likely.
Leeper and Walker (2011) describe the fiscal theory of the price level which foresees the inflation outcome.
For an earlier dissent, see Portes (2012).
The valuation effect of the stronger dollar on non-dollar holding in reserves implies that the decline in the stock overstates substantially the drawdown of reserves. See IMF (2017a) for an estimated decomposition.
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The authors thank José Maria Vidal Pastor for research assistance. The views expressed are those of the authors and not necessarily those of Rutgers University or the Bank for International Settlements.
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Bordo, M., McCauley, R.N. A Global Shortage of Safe Assets: A New Triffin Dilemma?. Atl Econ J 45, 443–451 (2017). https://doi.org/10.1007/s11293-017-9558-2
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DOI: https://doi.org/10.1007/s11293-017-9558-2