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Cheap but Flighty: How Global Imbalances create Financial Fragility

Author

Listed:
  • Enrico Perotti

    (University of Amsterdam, the Netherlands)

  • Toni Ahnert

    (Bank of Canada, Canada)

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 increase lending into marginal projects. Because safety conscious foreigners escape any risk by running 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.

Suggested Citation

  • Enrico Perotti & Toni Ahnert, 2015. "Cheap but Flighty: How Global Imbalances create Financial Fragility," Tinbergen Institute Discussion Papers 15-036/IV/DSF89, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20150036
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    Cited by:

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

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    More about this item

    Keywords

    capital flows; unstable funding; safe haven; absolute safety;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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