Reach for Yield and Fickle Capital Flows

Ricardo Caballero () and Alp Simsek

AEA Papers and Proceedings, 2018, vol. 108, 493-98

Abstract: In Caballero and Simsek (2017), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situation of Emerging Markets (EM) exchanging flows with Developed Markets (DM) that feature lower returns but less frequent crises. Relatively high DM returns help to mitigate EM crises by reducing fickle inflows and by providing greater liquidity. The situation dramatically changes as the DM returns fall, as this increases the fickle inflows driven by reach for yield and exacerbates EM crises.

JEL-codes: E43 F32 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pandp.20181056
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