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Reach for Yield and Fickle Capital Flows

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  • Ricardo J. Caballero
  • Alp Simsek

Abstract

In Caballero and Simsek (2017), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situation of Emerging Markets (EM) exchanging flows with Developed Markets (DM) that feature lower returns but less frequent crises. Relatively high DM returns help to mitigate EM crises by reducing fickle inflows and by providing greater liquidity. The situation dramatically changes as the DM returns fall, as this increases the fickle inflows driven by reach for yield and exacerbates EM crises.

Suggested Citation

  • Ricardo J. Caballero & Alp Simsek, 2018. "Reach for Yield and Fickle Capital Flows," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 493-498, May.
    • Handle: RePEc:aea:apandp:v:108:y:2018:p:493-98
    Note: DOI: 10.1257/pandp.20181056
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    References listed on IDEAS

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    1. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
    2. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
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    Cited by:

    1. Bianchi, Benedetta, 2021. "Cross-border credit derivatives linkages," ESRB Working Paper Series 115, European Systemic Risk Board.
    2. Marco Di Maggio & Amir Kermani & Kaveh Majlesi, 2020. "Stock Market Returns and Consumption," Journal of Finance, American Finance Association, vol. 75(6), pages 3175-3219, December.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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