A Model of Fickle Capital Flows and Retrenchment

Alp ÅžimÅŸek and Ricardo Caballero ()

No 13819, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a model of gross capital flows and analyze their role in global financial stability. In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness) while domestic investments abroad return home (retrenchment). When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices. Fickleness, however, creates a coordination problem since it encourages local policymakers to restrict capital inflows. When countries are asymmetric, capital flows are driven by additional mechanisms, reach-for-safety and reach-for-yield, that can destabilize the receiving country.

Keywords: Gross capital flows; Global liquidity; Fickleness; Retrenchment; Asset fire sales; Capital controls; Policy coordination; Scarcity of safe assets; Reach-for-safety; Reach-for-yield (search for similar items in EconPapers)
JEL-codes: E3 E4 F3 F4 F6 G1 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-opm
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Citations: View citations in EconPapers (6)

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Working Paper: A Model of Fickle Capital Flows and Retrenchment (2016)
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