A Global Safe Asset for and from Emerging Market Economies

Markus Brunnermeier and Lunyang Huang

No 25373, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E42 E43 F32 F33 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-ifn and nep-mac
Note: AP CF IFM ME
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Citations: View citations in EconPapers (9)

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Related works:
Chapter: A Global Safe Asset for and from Emerging Market Economies (2019)
Working Paper: A Global Safe Asset for and from Emerging Market Economies (2018)
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