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A Model of Fickle Capital Flows and Retrenchment

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  • Ricardo J. Caballero
  • Alp Simsek

Abstract

We develop a model of gross capital flows that addresses the tension between their fickleness during foreign crises and retrenchment during local crises. In a symmetric environment with domestic crises, capital flows mitigate fire sales since fickle inflows exit the crisis location at weak prices whereas past outflows provide liquidity at higher valuations. However, due to the public good aspect of flows’ liquidity services, local policymakers with financial stability concerns may restrict flows. Greater scarcity of safe assets and lower correlation between crises increase gross flows. With asymmetric locations, the model features reach-for-safety and reach-for-yield flows that can be destabilizing.

Suggested Citation

  • Ricardo J. Caballero & Alp Simsek, 2016. "A Model of Fickle Capital Flows and Retrenchment," NBER Working Papers 22751, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22751
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    Cited by:

    1. Auld, T. & Linton, O., 2017. "The Behaviour of Betting and Currency Markets on the Night of the EU Referendum," Cambridge Working Papers in Economics 1750, Faculty of Economics, University of Cambridge.
    2. Tom Auld & Oliver Linton, 2018. "The behaviour of betting and currency markets on the night of the EU referendum," CeMMAP working papers CWP01/18, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    3. Tom Auld & Oliver Linton, 2018. "Regime switching in the presence of endogeneity," Monash Econometrics and Business Statistics Working Papers 10/18, Monash University, Department of Econometrics and Business Statistics.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization
    • G1 - Financial Economics - - General Financial Markets

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