CFDP 2169

Global Collateral and Capital Flows


Publication Date: February 2019

Pages: 41


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: Collateral, Capital flows, Asset prices, Current account, Securitized markets, Asset-backed securities

JEL Classification Codes: D52, D53, E32, E44, F34, F36, G01, G11, G12

JEL Classification Codes: D52D53E32E44F34F36G01G11G12