A Global Safe Asset for Emerging Market Economies

Transcription

1 A Global Safe Asset for Emerging Market Economies Markus K. Brunnermeier, Lunyang Huang and Yuliy Sannikov Central Bank of Chile Conference Santiago de Chile, 16. Nov. 2017

2 Motivation 3 Stylized Facts 1. Carry trade activity by EME corporations and households 2. Flight Safety cross-border capital flows 3. Official reserve holdings 2

3 Carry Trades EME corporate treasuries borrow in Dollars Bruno & Shin

4 Carry Trades EME corporate treasuries borrow in Dollars Hungarian/Polish households borrow in Euros/Swiss Franc Bruno & Shin 2016 Verner

5 Carry Trades EME corporate treasuries borrow in Dollars Hungarian/Polish households borrow in Euros/Swiss Franc Sudden Stops: Carry Trade skewness up the stairs, down the lift Brunnermeier, Nagel & Pedersen

6 Flight to Safety Risk-on, Risk-off Flight to safe asset If asymmetrically supplied by AE Flight to safety cross-border capital flows Who insures whom? (rich the poor?) At times of global crisis issue new debt - for AE: at inflated prices - for EME: at depressed prices Question: is buffer large (long-term) enough s.t. no new debt issuance needed & sale off safe asset 6

7 Flight to Safety Risk-on, Risk-off Flight to safe asset If asymmetrically supplied by AE Flight to safety cross-border capital flows Who insures whom? (rich the poor?) At times of global crisis issue new debt - for AE: at inflated prices - for EME: at depressed prices Question: is buffer large (long-term) enough s.t. no new debt issuance needed & sale off safe asset 7

8 Flight to Safety Risk-on, Risk-off Flight to safe asset If asymmetrically supplied by AE Flight to safety cross-border capital flows At times of global crisis, issuance of new debt For AE at inflated prices eases conditions For EME at depressed prices worsens conditions Question: Who insures whom? (rich the poor OR poor the rich?) Correct insurance only if buffer is large (and debt long-term) enough so that no new debt issuance needed & sale off safe asset 8

9 Official Reserves Sudden Stop South East Asia crisis precautionary reserves Source: Kieran (Wikipedia) CIA World Factbook data

10 Official Reserves (without China) Mio 10

11 Buffer Approach Precautionary Reserves private Imbalances Carry trades Lowers funding costs Subsidizing carry trades public Buffers Reserves Lean against Sudden Stop outflows IMF liquidity lines Central Swap line arrangements 11

12 Pooling Rechanneling Approach Root cause: safe asset is supplied asymmetrically Create globally supplied safe asset via pooling & tranching A Pool of Sovereign Bonds Senior Bond Junior Bond L Tranching Rechannel: Instead of cross-border Across asset classes Expand ESBies idea for euro area to EME: SBBS (Sovereign-Bond Backed Securities) for the world Brunnermeier et al. 2011,

13 Overview Motivation What s a safe asset? Model Autarky Reserves and FX carry trades Sudden stop Sufficient reserves to deter sudden stops Insufficient reserves Unanticipated sudden stops Anticipated sudden stops Global Safe Asset from & for Emerging Market Economies 13

14 Safe assets Good friend analogy - like reserve assets Safe/available at any horizon - when it counts Precautionary buffer held in addition to more risky assets Risk demand for safe assets Safe asset tautology safe because it is perceived to be safe safe independent of fundamentals US Treasury downgrade by S&P in 2011 yield German CDS spread yield during Euro crisis Multiple equilibria Bubble

15 Safe assets Good friend analogy - like reserve assets Safe/available at any horizon - when it counts Precautionary buffer held in addition to more risky assets Risk demand for safe assets Pool of Risky assets Safe asset Deposits Equity

16 Safe assets Good friend analogy - like reserve assets Safe/available at any horizon - when it counts Precautionary buffer held in addition to more risky assets Risk demand for safe assets Safe asset tautology safe because it is perceived to be safe safe independent of fundamentals US Treasury downgrade by S&P in 2011 yield German CDS spread yield during Euro crisis Multiple equilibria Bubble Pool of Risky assets Safe asset Deposits Equity 16

17 Overview Motivation What s a safe asset? Model setup Autarky Add reserve holdings and FX carry trades Sudden stop Sufficient reserves to deter sudden stops Insufficient reserves Unanticipated sudden stops Anticipated sudden stops Global Safe Asset from & for Emerging Market Economies 17

18 Baseline model autarky - Each household can only operate one firm Physical capital dk t i k t i = Φ ι t i dt + σd Z t i Output y t i = Ak t i of which ι t i k t i is used to produce new physical capital Demand for safe asset A A A Productive capital Domestic Safe Asset HH/Firms EME Net worth L L L Stationary Equilibrium qk t value of physical capital dr k,i = A ι dt + Φ q ιi i dt + σd Z t pk t value of safe asset (absent inflation) dr D = ถΦ(ι) dt g 18

19 Optimality (=) for E 0 e ρt log c t i dt ) Investment rate, ι i Tobin s q: Φ ι = 1 q For Φ ι = 1 log(κι + 1) κι = q 1 κ (static problem) Portfolio choice, x k,i E dr Ka dr M /dt = Cov[dr Ka dr M, x a = E drka dr M /dt (σ) 2 dn t ] = x ด a ( n σ)2 t dr M +x a dr K dr M = (A ι)/q+μm (σ) 2 = q q+p Dividend yield on capital must be ρ Consumption, c i Demand ρn t = ρ q + p K t = a ι K t Supply q = q q + p =x a (a ι)/ρ

20 Optimality (=) & market clearing (=) Investment rate, ι i Tobin s q: Φ ι = 1 q (static problem) For Φ ι = ι log[κ(ι κ ι0 ) + 1] ι = ι (q 1) κ Portfolio choice, x k,i E dr Ka dr M /dt = Cov[dr Ka dr M, x a = E drka dr M /dt (σ) 2 dn t ] = x ด a ( n σ)2 t dr M +x a dr K dr M = (A ι)/q+μm (σ) 2 = q q+p Dividend yield on capital must be ρ Consumption, c i Demand ρn t = ρ q + p K t = a ι K t Supply q = q q + p =x a (a ι)/ρ

21 Optimality (=) & market clearing (=) Investment rate, ι i Tobin s q: Φ ι = 1 q For Φ ι = 1 log(κι + 1) κι = q 1 κ (static problem) Portfolio choice, x k,i E dr K dr D /dt = Cov[dr k dr D, x k,i = E drk dr D /dt (σ) 2 dn t ] = ดn xk,i ( σ)2 t dr K +x k,i dr k dr D = (A ι)/q (σ) 2 = q q+p Dividend yield on capital must be ρ Consumption, c i Demand ρn t = ρ q + p K t = a ι K t Supply q = q q + p =x a (a ι)/ρ

22 Optimality (=) & market clearing (=) Investment rate, ι i Tobin s q: Φ ι = 1 q For Φ ι = 1 log(κι + 1) κι = q 1 κ (static problem) Portfolio choice, x k,i E dr K dr D /dt = Cov[dr k dr D, x k,i = E drk dr D /dt (σ) 2 dn t ] = ดn xk,i ( σ)2 t dr K +x k,i dr k dr D = (A ι)/q (σ) 2 = q q+p Dividend yield on capital must be ρ Consumption, c i Demand ρn t = ρ q + p K t = a ι K t Supply q = q q + p =x a (a ι)/ρ

23 Optimality (=) & market clearing (=) Investment rate, ι i Tobin s q: Φ ι = 1 q For Φ ι = 1 log(κι + 1) κι = q 1 κ (static problem) Portfolio choice, x k,i E dr K dr D /dt = Cov[dr k dr D, x k,i = E drk dr D /dt (σ) 2 Dividend yield on capital must be ρ dn t ] = ดn xk,i ( σ)2 t dr K +x k,i dr k,i dr D Consumption, c i Demand ρn t = ρ q + p K t = A ι K t Output market clearing = (A ι)/q (σ) 2 = q q+p Capital market clearing Supply q = q q + p =x k,i (A ι)/ρ

24 Equilibrium Equilibrium w/o Safe Asset p 0 = 0 Safe Asset equilibrium p = σ ρ ρ q q 0 = κ(a ι0 )+1 κρ+1 q = κ(a ι0 )+1 > κ ρσ+1 q 0 p q 0 ρ σ ADJUST SOLUTION FOR OUR PHI FUNCTION

25 Overview Motivation What s a safe asset? Model Autarky Reserves and FX carry trades Sudden stop Sufficient reserves to deter sudden stops Insufficient reserves Unanticipated sudden stops Anticipated sudden stops Global Safe Asset from & for Emerging Market Economies 25

26 Risky Claim Our global economy A A A Productive capital Domestic Safe Asset HH/Firms EME Net worth L L Dollar Dollar Dollar Bond Bond Bond L A Dollar Bond US US Treasury L Central Bank/Banks EME A L Bubble US Treasury Domestic Safe Asset Later we will have many EMEs

27 Risky Claim EME Firms/Households includes carry trades x k,i, x D,i x $,i < 0 negative since borrowing at rate r ҧ $ Carry trade, since r D = Φ ι > r ҧ $ Limited by $-borrowing constraint (capital controls) A A A Productive capital Domestic Safe Asset HH/Firms EME Net worth L L Dollar Dollar Dollar Bond Bond Bond L x $,i = φx k,i Capital holding E[dr k + φ(r D r ҧ $ ) dn t i n t i x k,i = 1 σ 2 collateral boost B t $,i φqk t i = φn t i x k,i dr D ] = Cov[dr k dr D, dn t i n t i ] = x k,i dr k + 1 x k,i x $,i dr D + x $,i r ҧ $ dt c t i ni dt t A ι q + Φ ι rd + φ(r D r ҧ $ 27

28 EME Central Bank and Banks B t + FX t = D t = pk t Bubble grows db t = B t Φ ι dt FX t US Treasuries earn a real interest rate of r $ dfx t = r $ FX t dt + ΔFX t 1 α Deposit rate on (domestic safe asset) r $ FX t dt + B t Φ ι dt r D pk t dt = Tdt set aggregate transfer Tdt = 0 r D = αr $ + 1 α Φ ι α Central Bank/Banks EME A L Bubble US Treasury Domestic Safe Asset Newly acquired US Treasuries 28

29 Market Clearing on balance growth path Balanced growth path: dd t D t Goods market ρn t = A ι K t ( dd t D t = db $ t $ B t = dk t K t r D D t ) ( db t = Φ ι dt B t r ҧ $ B $ t ) ρ q + p + b $ = A ι Φ ι r D Φ ι r ҧ $ b $ Capital markets q = q + p + b $ x k Safe asset market p = q + p + b $ (1 x k x $ ) US dollar (debt) market clears by Walras Law 29

30 Equilibrium effects q = A ι σ ρ + Φ ι r D Φ ι r D φ(r D r ҧ $ ), ι = ι κ q 1, r D = αr $ + 1 α Φ(ι) x k = 1 A ι σ 2 q + Φ ι rd + φ(r D r ҧ $ p = 1 xk q. Two effects of reserves holding Reserves upkeep Reserves only grow at r $ --- have to constantly buy US Treasuries Portfolio rebalancing effect domestic safe asset holding is less attractive increases q Effects of carry trades As capital serves as collateral, it is attractive -> increases q Requires larger reserves (α) -> effects above x k 30

31 Overview Motivation What s a safe asset? Model Autarky Reserves and FX carry trades Sudden stop Sufficient reserves to deter sudden stops Insufficient reserves Unanticipated sudden stops Anticipated sudden stops Global Safe Asset from & for Emerging Market Economies 31

32 Sudden Stop with high reserves Sun-spot which potentially triggers US investors not to fund anymore Threshold depends on maturity structure of $ corporate bonds Conservative: very short-term corporate bonds Proposition: With sufficient reserves, αpk t B t $ αp α b $ α, self-fulfilling suddens stops do not occur 32

33 Sudden Stop with insufficient reserves Public reserves are used up. Hence, α + = 0 Jump of the exchange rate by j e = D t + + ( B $ t αd t ) = p+ b $ α D t p New steady state is A ι + q = σ ρ + Φ ι r D Φ ι r D φ(r D r ҧ $ ), ι = ι κ q+ 1, r D = αr $ + 1 α Φ ι, p + = Peso held by US investors x k,+ = ρ σ, σ A ι+ 1 ρ σ ρ. 33

34 Unanticipated vs. anticipated Sudden Stop λ = arrival rate of sunspot -> potential jump 34

35 Unanticipated vs. anticipated Sudden Stop λ = arrival rate of sunspot -> potential jump 35

36 Pooling Global Safe Asset Many emerging market economies Sunspot has potential to trigger systemic sudden stop For Δ fraction of EMEs A L Pool of Sovereign Bonds Senior Bond Junior Bond Tranching r senior = r junior = Φ ι q GSA = 36

37 Global Safe Asset Conclusion 1. Carry trade activity by EME corporations and households 2. Flight Safety cross-border capital flows 3. Official reserve holdings Distorts World Economy Rechannelling Approach instead of buffer Approach (reserves, IMF, swaplines) Root cause solution 37