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Elusive Safety: The New Geography of Capital Flows and Risk

Author

Listed:
  • Laura Alfaro
  • Ester Faia
  • Ruth Judson
  • Tim Schmidt-Eisenlohr

Abstract

A confidential dataset with industry-level disaggregation of U.S. cross-border claims and liabilities, shows U.S. securities to be increasingly intermediated by tax-haven-financial-centers (THFC) and less regulated funds. These securities are risky, in intangible-intensive sectors, requiring higher Sharpe ratios; while the foreign-official sector mainly holds Treasuries. Facts on private securities are rationalized through a model where firms with heterogeneous default probabilities, and funded by global intermediaries, endogenously locate affiliates in THFCs. A decline in the cost of funds or in THFC’s taxes/regulation, raises profits and firms’ incentives to enter THFCs. Firms appear elusively safe, intermediaries reduce monitoring incentives and debt risk increases.

Suggested Citation

  • Laura Alfaro & Ester Faia & Ruth Judson & Tim Schmidt-Eisenlohr, 2020. "Elusive Safety: The New Geography of Capital Flows and Risk," CESifo Working Paper Series 8249, CESifo.
  • Handle: RePEc:ces:ceswps:_8249
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    tax havens/financial centers; tax avoidance; regulation arbitrage; risk; uncertainty; heterogeneous firms; endogenous entry; endogenous monitoring;
    All these keywords.

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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