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Securitized Markets and International Capital Flows

Author

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  • Alexis Akira Toda

    (UC San Diego)

  • Gregory Phelan

    (Williams College)

Abstract

We study the effect of collateralized lending and securitization on international net and gross capital flows, growth, welfare, and inequality in a two country general equilibrium model with idiosyncratic investment risk. The financial sectors in the two countries, Home and Foreign, differ by the collateral requirement for investment loans, with Home requiring lower margins. In autarky, Home has higher interest rates, which enables more risk sharing through increased state contingency of collateralized loan contracts. Upon financial integration, capital flows from Foreign to Home, leading to lower interest rates, less risk sharing (more inequality), higher investment levels, and economic growth in Home. Despite low growth, Foreign enjoys substantial welfare gains through better risk sharing opportunities. The capital flows are driven by the greater endogenous supply of "safe-enough" assets by Home and the demand for those assets by Foreign.

Suggested Citation

  • Alexis Akira Toda & Gregory Phelan, 2016. "Securitized Markets and International Capital Flows," 2016 Meeting Papers 174, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:174
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    Cited by:

    1. Ana Fostel & John Geanakoplos & Gregory Phelan, 2015. "Global Collateral: How Financial Innovation Drives Capital Flows and Increases Financial Instability," Department of Economics Working Papers 2015-12, Department of Economics, Williams College, revised Feb 2017.
    2. Phelan, Gregory & Toda, Alexis Akira, 2019. "Securitized markets, international capital flows, and global welfare," Journal of Financial Economics, Elsevier, vol. 131(3), pages 571-592.
    3. Chen, William & Phelan, Gregory, 2021. "International coordination of macroprudential policies with capital flows and financial asymmetries," Journal of Financial Stability, Elsevier, vol. 56(C).

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