Reach for Yield and Fickle Capital Flows

In Caballero and Simsek (2017), 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 flow...

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Bibliographic Details
Published in:AEA papers and proceedings 2018-05, Vol.108, p.493-498
Main Authors: Caballero, Ricardo J., Simsek, Alp
Format: Article
Language:English
Subjects:
INTERNATIONAL FINANCE AND EMERGING MARKETS
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Summary:In Caballero and Simsek (2017), 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.
ISSN:2574-0768
2574-0776
DOI:10.1257/pandp.20181056