NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Lunyang Huang

Department of Economics
Bendheim Center for Finance
Princeton University

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Princeton University

NBER Working Papers and Publications

December 2018A Global Safe Asset for and from Emerging Market Economies
with Markus K. Brunnermeier: w25373
This paper examines how a newly designed global safe asset can mitigate international capital flows induced by flight-to-safety. In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and re-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond's safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the “buffer approach” international reserve holding reduces the severity of a crisis. In the “rechannelling approach” flight-to-safety capital flows are rechannelled from international cross-border flow...
 
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