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The risk-taking channel of international financial flows

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  • Cova, Pietro
  • Natoli, Filippo

Abstract

From the second half of the 1990s, the high saving propensity in emerging economies triggered massive inflows towards safe assets in the United States; then, from the early 2000s, global banks also increased investment in US markets targeting riskier securities. We investigate to what extent the global saving glut and the global banking glut have stimulated risk taking, and find significant effects on credit spreads, market volatility and bank leverage. In a VAR framework, we also detect linkages between foreign inflows, US household indebtedness and house prices, suggesting a substantial risk-taking channel. Our findings provide evidence of the autonomous role of foreign financial flows during the run-up to the global financial crisis.

Suggested Citation

  • Cova, Pietro & Natoli, Filippo, 2020. "The risk-taking channel of international financial flows," Journal of International Money and Finance, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:jimfin:v:102:y:2020:i:c:s0261560619305406
    DOI: 10.1016/j.jimonfin.2019.102096
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    More about this item

    Keywords

    Saving glut; Banking glut; Capital flows; Bank leverage; Risk-taking channel;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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