Capital Flows and the Global Collateral Cycle

Ana Fostel, John John and Gregory Phelan
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Ana Fostel: University of Virginia
John John: Yale University
Gregory Phelan: Williams College

No 2521, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Cross-country disparities in collateral technologies alone can account for large capital flows among mature economies, and allow the most advanced country to run a permanent trade deficit. When the collateral technology advantage is in creating negative beta (super safe) financial assets backed by positive beta assets, a Global Collateral Cycle emerges, with pro-cyclical gross and net flows and increased global asset price volatility. The supply of super safe assets is necessarily curtailed in downturns, providing a complementary (supply) channel to the flight to safety (demand) channel for explaining why US safe asset prices rise during crises.

Date: 2026-04-01
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