Citation

Discussion Paper Details

Please find the details for DP13819 in an easy to copy and paste format below:

Full Details

Title: A Model of Fickle Capital Flows and Retrenchment

Author(s): Ricardo Caballero and Alp Simsek

Publication Date: June 2019

Keyword(s): asset fire sales, capital controls, fickleness, Global liquidity, Gross capital flows, Policy Coordination, reach-for-safety, reach-for-yield, retrenchment and scarcity of safe assets

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: We develop a model of gross capital flows and analyze their role in global financial stability. In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness) while domestic investments abroad return home (retrenchment). When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices. Fickleness, however, creates a coordination problem since it encourages local policymakers to restrict capital inflows. When countries are asymmetric, capital flows are driven by additional mechanisms, reach-for-safety and reach-for-yield, that can destabilize the receiving country.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13819

Bibliographic Reference

Caballero, R and Simsek, A. 2019. 'A Model of Fickle Capital Flows and Retrenchment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13819