Safe Assets and Financial Fragility: Theory and Evidence

How does the access to safe assets affect the fragility and lending behavior of financial intermediaries? We develop a global-game model of investor redemptions from money market funds that hold safe assets and fund risky corporate borrowers. Using the 2013 U.S. debt limit episode and the Federal Reserve's Overnight Reverse Repurchase (ONRRP) facility as our empirical laboratory, we provide evidence consistent with the model's implications. In particular, access to a safe asset---the ONRRP---attenuates investor redemption incentives and allows money market mutual funds to maintain their lending to corporate borrowers. Overall, our results suggest that the public provision of a safe asset reduces intermediary fragility and increases lending to the real economy.