A Global Safe Asset for and from Emerging Market Economies

Markus Brunnermeier and Lunyang Huang

No 13387, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper examines international capital flows induced by flight-to-safety and proposes a new global safe asset. In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and fire-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond's safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the "buffer approach†international reserve holding reduces the severity of a crisis. In the "rechannelling approach'' flight-to-safety capital flows are rechannelled from international cross-border flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.

Keywords: Flight to safety; Capital flows; Sudden stop; Sovereign bond backed securities; Sbbs (search for similar items in EconPapers)
JEL-codes: F32 G23 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://cepr.org/publications/DP13387 (application/pdf)

Related works:
Chapter: A Global Safe Asset for and from Emerging Market Economies (2019)
Working Paper: A Global Safe Asset for and from Emerging Market Economies (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13387

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13387

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().