Cheap but Flighty: How Global Imbalances create Financial Fragility

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 15-036/IV/DSF89

Classification and Topics

• Classification: Wirtschaft
• Subject: capital flows ; unstable funding ; safe haven ; absolute safety

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Perotti, Enrico ; Ahnert, Toni
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/111714
• Last update: 10.03.2025, 11:43 AM CET