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Cross-country disparities in collateral technologies alone can
account for large capital flows among mature economies, and allow the
most advanced country to run a permanent trade deficit. When the collateral
technology advantage is in creating negative beta (super safe)
financial assets backed by positive beta assets, a Global Collateral Cycle
emerges, with pro-cyclical gross and net flows and increased global
asset price volatility. The supply of super safe assets is necessarily curtailed
in downturns, providing a complementary (supply) channel to the
flight to safety (demand) channel for explaining why US safe asset prices
rise during crises.
