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Elusive Safety: The New Geography of Capital Flows and Risk


  • Alfaro, Laura
  • Faia, Ester
  • Judson, Ruth
  • Schmidt-Eisenlohr, Tim


Using a unique confidential data set with industry disaggregation of official U.S. claims and liabilities, we find that the growing dollar-denominated securities are also increasingly intermediated by tax havens financial centers (THFC) and by less reg- ulated funds. These securities are risky and respond to tax rates and prudential regulations, suggesting tax avoidance and regulatory arbitrage. Issuers are mostly intangible-intensive multinationals, investors require a high Sharpe ratio, suggesting search for yield. In contrast, safe treasuries are mainly held by the foreign official sector and increased with quantitative easing policies. Facts on privately held securities are rationalized through a model where multinationals with heterogeneous default probabilities endogenously choose to shift profits and are funded by global intermediaries with endogenous monitoring intensity. A fall in the costs of global funds, by increasing firms' profits, shifts the distribution of entrants toward riskier ones and also reduces intermediaries' incentives to monitor both the extensive (fraction of monitored firms) and intensive margin, hence raising ex post risk. Firms appear elusively safe.

Suggested Citation

  • Alfaro, Laura & Faia, Ester & Judson, Ruth & Schmidt-Eisenlohr, Tim, 2020. "Elusive Safety: The New Geography of Capital Flows and Risk," CEPR Discussion Papers 14636, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14636

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    References listed on IDEAS

    1. Erika Brandner & Fang Cai & Ruth Judson, 2012. "Improving the measurement of cross-border securities holdings: the Treasury International Capital SLT," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May.
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    3. Eugenio Cerutti & Ricardo Correa & Elisabetta Fiorentino & Esther Segalla, 2017. "Changes in Prudential Policy Instruments - A New Cross-Country Database," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 477-503, March.
    4. Zohair Alam & Adrian Alter & Jesse Eiseman & Gaston G Gelos & Heedon Kang & Machiko Narita & Erlend Nier & Naixi Wang, 2019. "Digging Deeper--Evidence on the Effects of Macroprudential Policies from a New Database," IMF Working Papers 2019/066, International Monetary Fund.
    5. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
    6. Erika Brandner & Fang Cai & Ruth Judson, 2012. "Improving the measurement of cross-border securities holdings: the Treasury International Capital SLT," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 98(May), pages 1-28.
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    More about this item


    Endogenous entry; Geography of flows; Profit shifting; risk; safe assets; Tax avoidance; tax havens;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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