Document Type
Discussion Paper
Publication Date
2-1-2019
CFDP Number
2169
CFDP Pages
41
Journal of Economic Literature (JEL) Code(s)
D52, D53, E32, E44, F34, F36, G01, G11, G12
Abstract
Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility.
Recommended Citation
Fostel, Ana; Geanakoplos, John; and Phelan, Gregory, "Global Collateral and Capital Flows" (2019). Cowles Foundation Discussion Papers. 89.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/89