Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/95681 
Year of Publication: 
2013
Series/Report no.: 
Bank of Canada Working Paper No. 2013-34
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We examine the safety of government bonds in the presence of Knightian uncertainty amongst financial market participants. In our model, the information insensitivity of government bonds is driven by strategic complementarities across counterparties and the structure of trading relationships. We identify the frontier between safe and unsafe assets and show how the growth rate of the economy and its fiscal capacity interact with the degree of ambiguity amongst investors to determine the safe-asset equilibrium. We use our framework to illustrate a fiscal variation on the Triffin dilemma, in which the role of a country as sole provider of international liquidity is questioned as its size in the world economy - and hence its fiscal capacity - diminishes.
Subjects: 
Economic models
Financial stability
International financial markets
JEL: 
E44
D81
F02
F41
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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