Institutional Affiliation: Federal Reserve System [FRS]
|Elusive Safety: The New Geography of Capital Flows and Risk|
with , , : w27048
Using a unique confidential data set with industry disaggregation of official U.S. claims and liabilities, we find that dollar-denominated securities are increasingly intermediated by tax havens financial centers (THFC) and by less regulated funds. These securities are risky and respond to tax rates and prudential regulations, suggesting tax avoidance and regulatory arbitrage. Issuers are mostly intangible-intensive multinationals, investors require a high Sharpe ratio, suggesting search for yield. In contrast, safe treasuries are mainly held by the foreign offcial sector and increased with quantitative easing policies. Facts on privately held securities are rationalized through a model where multinationals with heterogeneous default probabilities endogenously choose to shift profits and a...