Year: 2016
Type: report
Abstract: We develop a model of gross capital flows and analyze their role in global financial stability.In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness) while domestic investments abroad return home (retrenchment).When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices.Fickleness, however, creates a coordination problem since it encourages local policymakers to restrict capital inflows.When countries are asymmetric, capital flows are driven by additional mechanisms, reach-for-safety and reach-for-yield, that can destabilize the receiving country.
DOI: 10.3386/w22751
Authors: Ricardo Caballero, Alp Simsek
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
Funder: National Science Foundation
OpenAlex ID: W2581960374