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Global Collateral and Capital Flows

Ana Fostel, John Geanakoplos and Gregory Phelan
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John Geanakoplos: Yale University, http://campuspress.yale.edu/johngeanakoplos/

No 2019-01, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility.

Keywords: Collateral; capital flows; asset prices; current account; securitized markets; asset-backed securities (search for similar items in EconPapers)
JEL-codes: D52 D53 E32 E44 F34 F36 G01 G11 G12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-opm
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