Working Paper: NBER ID: w25583
Authors: Ana Fostel; John Geanakoplos; Gregory Phelan
Abstract: Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility.
Keywords: No keywords provided
JEL Codes: D52; D53; E32; E44; F34; F36; G01; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cross-country differences in the ability to use assets as collateral to back financial promises (F65) | gross financial flows between advanced economies (F32) |
| financial integration (F30) | asset price volatility (G19) |
| negative shocks (F69) | gross financial flows collapse (F65) |