Several recent studies have documented a marked accumulation of safe assets by firms; others have shown a generalized drop in interest rates. The work jointly rationalizes this evidence in a growth model with heterogeneous agents in which aggregate shocks induce variations in the shares of income from labor and capital, and financial frictions (‘skin in the game’ constraints) prevent an efficient sharing of risk.
In the model, an accumulation of safe assets by companies naturally emerges as a tool to improve risk sharing in the presence of financial frictions. The demand for safe assets is greater the higher the share of capital income, leading to a reduction in the interest rate. The work shows that these portfolio adjustments and the reduction in interest rates can be quantitatively relevant and in line with the empirical evidence for the United States.
