Reach for Yield and Fickle Capital Flows
AbstractIn Caballero and Simsek (2017), 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.
CitationCaballero, Ricardo J., and Alp Simsek. 2018. "Reach for Yield and Fickle Capital Flows." AEA Papers and Proceedings, 108: 493-98. DOI: 10.1257/pandp.20181056
- E43 Interest Rates: Determination, Term Structure, and Effects
- F32 Current Account Adjustment; Short-term Capital Movements