Liquidity Deflation and Safe Assets Shortage

The current debate about slow recovery from the Great Deflation, accompanied by persistent threat of price deflation, has highlighted the relevance of liquidity as a necessary factor to ensure stability and growth. An important branch of the literature focuses on the Safe Assets (i.e., liquid assets which market values are highly resilient in terms of goods and services), and pays special attention to scenarios in which shortage of safe assets prevents achieving full employment and gives rise to other costly distortions. This situation is especially relevant when the Zero Lower Bound on safe assets interest rates, ZLB, is binding, and prices are downward inflexible (see Caballero, Farhi and Gourinchas 2016 and 2017).