A Global Safe Asset for and from Emerging Market Economies
Markus Brunnermeier () and
No 13387, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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: Capital Flows; Flight to safety; SBBS; sovereign bond backed securities; sudden stop (search for similar items in EconPapers)
JEL-codes: F32 G23 (search for similar items in EconPapers)
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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)
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