A Global Safe Asset for and from Emerging Market Economies / Markus K. Brunnermeier, Lunyang Huang.

Format:

Book

Author/Creator:

Brunnermeier, Markus K.

Contributor:

National Bureau of Economic Research.

Huang, Lunyang.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25373.

NBER working paper series no. w25373

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

This paper examines how a newly designed global safe asset can mitigate international capital flows induced by flight-to-safety. In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and re-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond's safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the "buffer approach" international reserve holding reduces the severity of a crisis. In the "rechannelling approach" flight-to-safety capital flows are rechannelled from international cross-border flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.

Notes:

Print version record

December 2018.