Working Paper: NBER ID: w24400
Authors: Ricardo J. Caballero; Alp Simsek
Abstract: In Caballero and Simsek (2018), 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.
Keywords: fickle capital flows; emerging markets; developed markets; global liquidity
JEL Codes: F3; F34; F4; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital flows (F32) | global liquidity (F65) |
| returns in DM (Y60) | stability of EM economies (F36) |
| global liquidity (F65) | stability of EM economies (F36) |
| returns in DM (Y60) | fickle inflows into EM (F32) |
| fickle inflows into EM (F32) | crises in EM (H12) |
| returns in DM (Y60) | crises in EM (H12) |