Does a shortage of safe assets sow the seeds of instability in a financial system?
 
We empirically explore the hypothesis of safe asset shortage-induced excess credit booms and financial instability. As an alternative step forward from the assumption of growth- or wealth-based demands for safe assets, we underline demographic factors as a key determinant of safe asset demands. Based on the long-run trends of aging and government debt, we construct a new safe asset shortage index. Using the index, consecutive empirical exercises confirm the positive relationship of safe asset shortage-credit expansion-aggregate risks of a financial system. The estimation of the crisis probabilistic model for 17 advanced economies in 1960–2013 presents new evidence that the (high) level of private credit at a time of increasing safe asset shortage is the major predictor of financial crises. The fixed-effect panel analysis results for 18 advanced countries in 1980–2016 also show a significant, positive contribution of a safe asset shortage to credit growth. The total effect of the shortage depends positively on securitization growth and negatively on net capital outflows. The latter effect is considerably dominant.