In this paper we analyze from a theoretical point of view the determinants and the macroeconomic implications of a shortage of safe assets. Differently from a large part of the literature, in this model the degree of safeness of an asset is not an intrinsic characteristic. An asset is safe when it circulates in the economy and is accepted as a payment or collateral instrument without the incentive to check its quality every time.
When the availability of safe assets is low, the amount of trade and the production of goods are at sub-optimal levels, even when prices are flexible. The optimal level of transactions cannot be attained because the other assets have a lower degree of liquidity. In this case only a sufficiently high increase in the supply of safe assets makes it possible to reach the optimal level of production and trade, while smaller variations could have only redistributive effects, leaving total welfare unchanged.
