Global Collateral and Capital Flows

41 Pages Posted: 27 Feb 2019

See all articles by Ana Fostel

Ana Fostel

University of Virginia - Department of Economics

John Geanakoplos

Yale University; Santa Fe Institute

Gregory Phelan

Williams College

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2019


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: D52, D53, E32, E44, F34, F36, G01, G11, G12

Suggested Citation

Fostel, Ana and Geanakoplos, John D and Phelan, Gregory, Global Collateral and Capital Flows (February 27, 2019). Cowles Foundation Discussion Paper No. 2169 (2019), Available at SSRN: or

Ana Fostel

University of Virginia - Department of Economics ( email )

237 Monroe Hall
P.O. Box 400182
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United States

John D Geanakoplos (Contact Author)

Yale University ( email )

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New Haven, CT 06511
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Santa Fe Institute ( email )

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Santa Fe, NM 87501
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Gregory Phelan

Williams College ( email )

Williamstown, MA 01267
United States

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