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Cheap but flighty: how global imbalances create financial fragility

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  • Ahnert, Toni
  • Perotti, Enrico C

Abstract

Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increases lending into marginal projects. Because safety conscious foreigners escape any risk by running also in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume.

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  • Ahnert, Toni & Perotti, Enrico C, 2015. "Cheap but flighty: how global imbalances create financial fragility," CEPR Discussion Papers 10502, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10502
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    Cited by:

    1. Ahnert, Toni & Anand, Kartik & Gai, Prasanna & Chapman, James, 2015. "Safe, or not safe? Covered bonds and Bank Fragility," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112875, Verein für Socialpolitik / German Economic Association.
    2. Toni Ahnert & Benjamin Nelson, 2016. "Opaque Assets and Rollover Risk," Staff Working Papers 16-17, Bank of Canada.
    3. Enrico Perotti & Rafael Matta, 2015. "Insecure Debt," Tinbergen Institute Discussion Papers 15-035/IV/DSF88, Tinbergen Institute.
    4. Toni Ahnert & Kartik Anand & Prasanna Gai & James Chapman & Philip StrahanEditor, 2019. "Asset Encumbrance, Bank Funding, and Fragility," Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2422-2455.
    5. Golec, Pascal & Perotti, Enrico, 2017. "Safe assets: a review," Working Paper Series 2035, European Central Bank.

    More about this item

    Keywords

    absolute safety; capital flows; safe haven; unstable funding;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services

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