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Elusive Safety: The New Geography of Capital Flows and Risk

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  • Faia, Ester
  • Alfaro, Laura
  • Judson, Ruth
  • Schmidt-Eisenlohr, Tim

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.

Suggested Citation

  • Faia, Ester & Alfaro, Laura & Judson, Ruth & Schmidt-Eisenlohr, Tim, 2020. "Elusive Safety: The New Geography of Capital Flows and Risk," CEPR Discussion Papers 14636, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14636
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    More about this item

    Keywords

    Tax havens/financial centers; Tax avoidance; Regulatory arbitrage; Risk; Uncertainty; Heterogeneous firms; Endogenous entry; Endogenous monitoring;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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