The Private Production of Safe Assets

We find that only very short-term private securities benefit from a premium for safety. Further, we show that the issuance of short-term CDs strongly responds to measures of safety demand. Our identification strategy uses a combination of exclusion restrictions in a structural model of demand/supply equations, and an instrumental variables approach. The private production of safe assets is stronger for issuers with high creditworthiness, and breaks down during episodes of market stress even though the market does not freeze. We conclude that even very short-term private assets are sensitive to changes in the information environment.