 Cheap but flighty: A theory of safety-seeking capital flowsToni Ahnert and Enrico Perotti Journal of Banking & Finance, 2021, vol. 131, issue C Abstract: We offer a model of financial intermediaries as safe-asset providers in an international context. Investors from countries exposed to expropriation risk seek to invest in safe-haven countries in order to satisfy a demand for safety. Intermediaries compete for such cheap funding by carving out safe claims, which requires demandable debt. While these safety-seeking inflows allow developed countries to lower their funding cost and expand investment, risk-intolerant investors achieve safety by withdrawing even under minimal residual risk. As a result, safety-seeking inflows into developed countries not only reallocate but also create risk. Early liquidation inefficiently diverts scarce resources from productive uses, so a domestic planner wishes to contain the scale of safety-seeking inflows. A macroprudential regulator imposes a Pigouvian tax on safety-seeking inflows. Keywords: Capital flows; Safe assets; Demandable debt; Unstable funding; Safe haven; Macroprudential regulation; Pigouvian tax (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:131:y:2021:i:c:s0378426621001709 DOI: 10.1016/j.jbankfin.2021.106211 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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