NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Global Collateral and Capital Flows

Ana Fostel, John Geanakoplos, Gregory Phelan

NBER Working Paper No. 25583
Issued in February 2019
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w25583

 
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