22 Feb 2018

How safe is a safe asset?

Paul De Grauwe / Yuemei Ji

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This contribution focuses on a recent proposal put forward by the European Systemic Risk Board to create a “safe asset” for the eurozone based on a repackaging of the risks of sovereign bonds, in the hope of stabilising an otherwise unstable system of sovereign bond markets. In the present paper, however, authors Paul De Grauwe and Yuemei Ji argue that a financial system that is fundamentally unstable cannot be stabilised by financial engineering. To this end, they first describe the nature of the instability of the government bond markets in a monetary union and then analyse whether this proposal of creating a safe asset will succeed in stabilising government bond markets in the eurozone.

Paul De Grauwe is a Belgian economist and John Paulson Professor in European Political Economy at the London School of Economics and Political Science. Yuemei Ji is a lecturer in Economics at University College London.