Elusive Safety: The New Geography of Capital Flows and Risk

47 Pages Posted: 28 Apr 2020 Last revised: 29 May 2021

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Ester Faia

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Ruth Judson

Board of Governors of the Federal Reserve System

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: April 2020

Abstract

A confidential dataset with industry-level disaggregation of U.S. cross-border claims and liabilities, shows U.S. securities to be increasingly intermediated by tax-haven-financial-centers (THFC) and less regulated funds. These securities are risky, in intangible-intensive sectors, requiring higher Sharpe ratios; while the foreign-official sector mainly holds Treasuries. Facts on private securities are rationalized through a model where firms with heterogeneous default probabilities, and funded by global intermediaries, endogenously locate affiliates in THFCs. A decline in the cost of funds or in THFC's taxes/regulation, raises profits and firms' incentives to enter THFCs. Firms appear elusively safe, intermediaries reduce monitoring incentives and debt risk increases.

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Suggested Citation

Alfaro, Laura and Faia, Ester and Judson, Ruth A. and Schmidt-Eisenlohr, Tim, Elusive Safety: The New Geography of Capital Flows and Risk (April 2020). NBER Working Paper No. w27048, Available at SSRN: https://ssrn.com/abstract=3586180

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Ester Faia

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ruth A. Judson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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