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Reach for Yield and Fickle Capital Flows

Ricardo Caballero () and Alp Simsek

No 24400, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In Caballero and Simsek (2018), 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: F3 F34 F4 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
Date: 2018-03
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Published as Ricardo J. Caballero & Alp Simsek, 2018. "Reach for Yield and Fickle Capital Flows," AEA Papers and Proceedings, vol 108, pages 493-98.

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