The European Central Bank published Working Paper No 3126, which uses sector-level financial accounts data for 21 advanced economies since 1980 to examine who issues and holds “safe assets” and how foreign demand for safety relates to macroeconomic outcomes. The paper finds that the foreign sector has become the key driver of rising safe-asset holdings relative to GDP, and that stronger foreign demand for safety is associated with domestic credit booms and weaker medium-term real GDP growth. Safe-asset growth is documented as being accommodated by increased issuance from financial intermediaries and the public sector, while fluctuations are attributed largely to the foreign and financial sectors, which are closely linked. More than 90% of gross safe-asset fluctuations are driven by these two sectors, with the foreign sector accounting for 39% of fluctuations despite holding 23% of safe assets on average; households and firms hold 36% on average but account for 4% of fluctuations. On net positions, each USD 1 of foreign net safe-asset acquisition is estimated to be met mainly by domestic financial-sector net issuance (USD 0.81 in OLS, largely via bank deposits and financial-sector bonds), with smaller public-sector net issuance (USD 0.17); instrumenting foreign demand using foreign exchange reserve accumulation in selected East Asian economies implies an even stronger financial-sector response (close to USD 1). The same foreign-demand measures are linked to higher domestic risky lending (USD 0.61 per USD 1 in OLS and USD 0.47 when instrumented) and lower subsequent GDP growth, while higher public safe-asset supply is not associated with lower medium-term growth in the paper’s regressions.
European Central Bank 2025-09-30
European Central Bank publishes working paper linking foreign safe-asset demand to domestic credit expansion and weaker medium-term growth
The European Central Bank's Working Paper No 3126 analyzes sector-level financial accounts data from 21 advanced economies since 1980, highlighting the foreign sector as a key driver of rising safe-asset holdings relative to GDP. Increased foreign demand for safety correlates with domestic credit booms and weaker medium-term real GDP growth, with fluctuations in safe-asset holdings primarily driven by the foreign and financial sectors. Foreign net safe-asset acquisition is largely met by domestic financial-sector net issuance, influencing domestic risky lending and GDP growth.