I heard an interesting tale during my Riksbank visit, from Karolina Ekholm, Deputy Governor. She explained to me that in the immediate aftermath of the crisis, the Swedish debt management office were OVER-issuing government debt [ie selling more than they needed to finance the deficit] and using the proceeds to finance the acquisition of riskier, private sector assets. So they were doing negative QE. If you accept the line of argument pushed by Vissing-Jorgensen and Krishnamurthy, and also Caballero and Farhi, that there is a special demand for safe assets with duration, then this is just what the authorities should be doing at times of heightened financial stress and low risk tolerance. Central banks commonly use the event study analyses showing that QE lowered yields (raised prices) on government bonds as evidence that what they were doing was a success. But, on the contrary, this impact on yields could measure not the benefit, but the cost imposed by starving the economy of safe assets and of foregoing the benefits of the better, Swedish variety.’
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The above Swedish policy sounds to me like a subsidy of riskier investments. I don’t like the sound of that.
And I’m not persuaded by “the economy needs safe assets” argument. Any chance of your expanding on the above arguments?
Two wrongs often make, if not a right, then something better than it would be.
Thanks. It’s not great that the public sector buys these risky assets. And it is a subsidy of sorts. But two wrongs can make, if not a right, then something better. The motivation is that the cost of finance has risen inefficiently high because of market failure in some form of intermediation. This inefficiently low tolerence for risk can be compensated for by the public sector stepping in temporarily. The argument about the economy needing safe assets is very eloquently made by Caballero in several of his papers, so you should go there for the best explanation of it. Its essence is that when risk tolerance falls, demand for safe assets rises. If there is no more room to stuff assets under the mattrass, then someone needs to provide more mattrasses!