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A Global Safe Asset for and from Emerging Market Economies

In: Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications

Author

Listed:
  • Markus K. Brunnermeier

    (Princeton University)

  • Lunyang Huang

    (Princeton University)

Abstract

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 flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Markus K. Brunnermeier & Lunyang Huang, 2019. "A Global Safe Asset for and from Emerging Market Economies," Central Banking, Analysis, and Economic Policies Book Series,in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.), Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 5, pages 111-167 Central Bank of Chile.
  • Handle: RePEc:chb:bcchsb:v26c05pp111-167
    as

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    File URL: http://si2.bcentral.cl/public/pdf/banca-central/pdf/v26/SBCv26pp111-167.pdf
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    References listed on IDEAS

    as
    1. Gary Gorton & Stefan Lewellen & Andrew Metrick, 2012. "The Safe-Asset Share," American Economic Review, American Economic Association, vol. 102(3), pages 101-106, May.
    2. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    3. repec:oup:ecpoli:v:32:y:2017:i:90:p:175-219. is not listed on IDEAS
    4. Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2017. "ESBies: safety in the tranches," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 175-219.
    5. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    6. repec:aea:jecper:v:31:y:2017:i:3:p:29-46 is not listed on IDEAS
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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