ABSTRACT
This chapter discusses the phenomenon of safe asset shortage and its implications for financial stability. The quest to understand the reasons for the scarcity of safe assets reveals an array of factors that can be subgrouped into those with excessively high demand on the one hand and insufficient supply on the other. Although the post-COVID world, with its fiscal expansion as a policy tool, has alleviated the problem to some extent, in the long run, the imbalance in supply and demand may not disappear. In the context of a safe asset market, it is important to recognise the risk of financial instability. The chapter outlines the consequences of the demand-supply mismatch of safe assets, revealing the consequences for the financial stability and functioning of the international monetary system. Additionally, alternative sources of safe asset creation are mentioned, stressing the role of the European Union’s debt issuance and common debt initiatives within EMU, as well as noteworthy cases of EMEs’, such as China and India. These emerging markets can potentially supplement the global safe asset supply, and they are already playing an increasingly important role in the global economy. However, threats may arise that could restrict their potential role as global safe asset providers. Finally, the evolution of the forms of money and their relationship to safe asset creation mechanisms are analysed. A key focus is placed on the impact of cryptocurrencies and the central bank digital currencies on these instruments.
