Reach for Yield and Fickle Capital Flows
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.
Simsek acknowledges support from the National Science Foundation (NSF) under Grant Number SES-1455319. Prepared for the AEA Session on International Finance and Emerging Markets, ASSA January 2018. We thank Olivier Jeanne for his discussion and comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Ricardo J. Caballero & Alp Simsek, 2018. "Reach for Yield and Fickle Capital Flows," AEA Papers and Proceedings, vol 108, pages 493-98. citation courtesy of