Template-Type: ReDIF-Article 1.0
Author-Name: Dániel Horváth
Author-Name: Róbert Szini
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: horvathd@mnb.hu
Title: The safety trap – the financial market and macroeconomic consequences of the scarcity
of safe assets
Abstract: Despite near-zero interest rates set by large central banks and other steps towards
monetary easing in recent years, the economic environment has been characterised by
low inflation globally and deflationary fears in some regions, while real economic activity
has remained moderate. Although symptoms of this phenomenon are similar to that of the
liquidity trap, important differences may be identified, which suggests that other factors
may be important as well. One of the new approaches to appear in the literature identifies
the structural excess demand of safe assets as a background factor that was aggravated by
cyclical effects in the crisis. The mechanism of the so-called safety trap is similar to that of
the liquidity trap, but it can be observed among safe assets; therefore, it can be considered
a special type of liquidity trap. Financial market tensions trigger an economic downturn
and a deflationary spiral in both cases, but different types of monetary policy responses
may be effective. While forward guidance may be effective in the case of a liquidity trap,
certain quantitative easing policies may provide a solution in the case of a safety trap.
Classification-JEL: G01, G15, E44, E52
Keywords: financial markets, risk-free assets, liquidity trap, monetary policy
Journal: Financial and Economic Review  
Pages: 111–138
Volume: 14
Issue: 1
Year: 2015
File-URL: http://english.hitelintezetiszemle.hu/letoltes/5-horvath-szini-en.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:14:y:2015:i:1:p:111-138