Securitized Markets, International Capital Flows, and Global Welfare
48 Pages Posted: 13 Nov 2015 Last revised: 29 Jan 2018
Date Written: January 28, 2018
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 may lose from financial integration due to the endogenous reduction in risk sharing, and aggregate shocks can generate large gross capital flows.
Keywords: collateralized loan obligations, endogenous risk sharing, global imbalances, gross international asset positions, safe assets
JEL Classification: D52, F32, F36, G11, G15, G23
Suggested Citation: Suggested Citation