Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123778
Authors: 
Ahnert, Toni
Perotti, Enrico
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Working Paper 2015-33
Abstract: 
We analyze how a wealth shift to emerging countries may lead to instability in developed countries. Investors exposed to expropriation risk are willing to pay a safety premium to invest in countries with good property rights. Domestic intermediaries compete for such cheap funding by carving out safe claims, which requires demandable debt. While foreign inflows allow countries to expand their domestic credit, risk-intolerant foreign investors withdraw even under minimal uncertainty. We show that more foreign funding causes larger and more frequent runs. Beyond some scale, even risk-tolerant domestic investors are induced to withdraw to avoid dilution. As excess liquidation causes social losses, a domestic planner may seek prudential measures on the scale of foreign inflows.
Subjects: 
Financial stability
Financial institutions
JEL: 
F3
G2
Document Type: 
Working Paper

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