Securitized markets,international capital flows,and global welfare |
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Authors: | Gregory Phelan Alexis Akira Toda |
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Institution: | 1. Department of Economics, Williams College, 24 Hopkins Hall Dr., Williamstown, MA 01267, USA;2. Department of Economics, University of California San Diego, 9500 Gilman Dr., La Jolla, CA 92093, USA |
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Abstract: | We study the effect of collateralized lending and securitization on international capital flows and welfare in a two-country general equilibrium model with idiosyncratic investment risk. The low-margin country (Home) endogenously supplies more safe assets and enables more risk sharing. Upon financial integration, capital flows from Foreign (high-margin country) to Home, leading to lower interest rates and a larger global supply of safe assets. Unlike in standard models with partial equity issuance, in our model, Home can lose from financial integration due to the endogenous reduction in risk sharing and aggregate shocks can generate large gross capital flows. |
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Keywords: | Collateralized loan obligations Endogenous risk sharing Global imbalances Gross international asset positions D52 F32 F36 G11 G15 G23 |
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