Securitized Markets and International Capital Flows

Alexis Akira Toda and Gregory Phelan
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Alexis Akira Toda: UC San Diego

No 174, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effect of collateralized lending and securitization on international net and gross capital flows, growth, welfare, and inequality in a two country general equilibrium model with idiosyncratic investment risk. The financial sectors in the two countries, Home and Foreign, differ by the collateral requirement for investment loans, with Home requiring lower margins. In autarky, Home has higher interest rates, which enables more risk sharing through increased state contingency of collateralized loan contracts. Upon financial integration, capital flows from Foreign to Home, leading to lower interest rates, less risk sharing (more inequality), higher investment levels, and economic growth in Home. Despite low growth, Foreign enjoys substantial welfare gains through better risk sharing opportunities. The capital flows are driven by the greater endogenous supply of "safe-enough" assets by Home and the demand for those assets by Foreign.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:174

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