Discussion paper

DP14636 Elusive Safety: The New Geography of Capital Flows and Risk

A confidential dataset with industry-level disaggregation of U.S. cross-border claims and liabilities, shows U.S. securities to be increasingly intermediated by tax-haven- financial-centers (THFC) and less regulated funds. These securities are risky, in intangible-intensive sectors, requiring higher Sharpe ratios; while the foreign-official sector mainly holds Treasuries. Facts on private securities are rationalized through a model where firms with heterogeneous default probabilities, and funded by global intermediaries, endogenously locate affiliates in THFCs. A decline in the cost of funds or in THFC’s taxes/regulation, raises profits and firms’ incentives to enter THFCs. Firms appear elusively safe, intermediaries reduce monitoring incentives and debt risk increases.


Alfaro, L, E Faia, R Judson and T Schmidt-Eisenlohr (2020), ‘DP14636 Elusive Safety: The New Geography of Capital Flows and Risk‘, CEPR Discussion Paper No. 14636. CEPR Press, Paris & London. https://cepr.org/publications/dp14636