A Global Safe Asset for & from Emerging Market Economies

Transcription

1 A Global Safe Asset for & from Emerging Market Economies Markus 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 activities by EME corporations and households 2. Flight-to-safety cross-border capital flows 3. Official reserve holdings Global Financial Architecture from buffering approach to rechanneling approach 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 Less risky carry trade Subsidizing carry trades public Buffers Reserves Lean against Sudden Stop outflows IMF liquidity lines Central Swap line arrangements 11

12 Rechanneling Approach Root cause: safe asset is supplied asymmetrically 12

13 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 Euro-nomics group 2011, 2016, 2017 (including Ricardo Reis) 13

14 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 14

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 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

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

17 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 Treasuries downgrade by S&P in 2011 yield German CDS spread yield during Euro crisis Multiple equilibria Bubble 17

18 Overview Motivation What s a safe asset? Model 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 18

19 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 HH/Firms EME A A A Productive capital Net Domestic worth Safe Asset 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 19

20 Optimality (=) for E 0 e ρt log c t i dt ) 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 (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

22 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 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 (static problem) For Φ ι = ι log(κ(ι κ ι0 ) + 1) ι = ι (q 1) κ 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

24 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 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 Capital market clearing Supply q = q q + p =x k,i (A ι)/ρ

25 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 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 Output market clearing Demand ρn t = ρ q + p K t = A ι K t Capital market clearing Supply q = q q + p =x k,i (A ι)/ρ

26 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

27 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 27

28 Risky Claim Our global economy HH/Firms EME A A A Physical Capital Net worth Domestic Safe Asset 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

29 Risky Claim EME Firms/Households Portfolio choice includes carry trades x k,i x D,i x $,i < 0 negative since borrowing at rate r ҧ $ Carry trades, since r D = Φ ι > ҧ Limited by $-borrowing constraint (capital controls) r $ HH/Firms EME A A A Physical Capital Net worth Domestic Safe Asset L L Dollar Dollar Dollar Bond Bond Bond L x $,i = φx k,i Capital holdings E[dr k + φ(r D r ҧ $ ) dn t i n t i x k,i = 1 σ 2 B t $,i φqk t i = φn t i x k,i collateral boost 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 $ 29

30 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 Domestic Safe Asset rate 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 30

31 Market Clearing on balance growth path Balanced growth path: dd t D t Goods market ρn t = A ι K t ( dd t ρ q + p + b $ Capital market 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 ) = A ι Φ ι r D p Φ ι r ҧ $ b $ 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 31

32 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 holdings Reserves upkeep effect x k Reserves only grow at r $ have to constantly buy US Treasuries q Portfolio rebalancing effect Holdings of domestic safe asset is less attractive compared to capital q Effects of carry trades As capital serves as collateral, it is attractive Requires larger reserves (α) above two effects q 32

33 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 33

34 Sudden Stop with high reserves Sun-spot which potentially triggers U.S. 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 34

35 Sudden Stops 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 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, p + = x k,+ = ρ σ, σ A ι+ 1 ρ σ ρ. 35

36 Sudden Stops 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 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, p + = Peso held by US investors x k,+ = ρ σ, σ A ι+ 1 ρ σ ρ. 36

37 Unanticipated vs. Anticipated Sudden Stop λ = arrival rate of sunspots potential jump Smaller α + afterwards 37

38 Unanticipated vs. Anticipated Sudden Stop λ = arrival rate of sunspots potential jump Jump down in capital price q Jump down in exchange rate 38

39 Pooling Global Safe Asset Many emerging market economies Sunspots have 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 GSA q GSA = A ι GSA σ ρ φ(φ ι GSA r ҧ $ ι GSA = ι κ q GSA 1 r D GSA = Φ(ι GSA ) 39

40 Pooling Global Safe Asset Many emerging market economies Sunspots have potential to trigger systemic sudden stop For Δ fraction of EMEs A L Pool of Sovereign Bonds Senior Bond Junior Bond Tranching Junior bond has to absorb potential exchange rate risk r senior = r junior = Φ ι GSA q GSA = A ι GSA σ ρ φ(φ ι GSA r ҧ $ ι GSA = ι κ q GSA 1 r D GSA = Φ(ι GSA ) 40

41 Pooling Global Safe Asset Many emerging market economies Sunspots have 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 GSA q GSA = A ι GSA σ ρ φ(φ ι GSA r ҧ $ ι GSA = ι κ q GSA 1 r D GSA = Φ(ι GSA ) 41

42 Global Safe Asset from & for EME 1. Carry trade activities by EME corporations and households 2. Flight Safety cross-border capital flows 3. Official reserve holdings Distorts World Economy lower growth favors citizens who have ability to do carry trade (redistributional aspects) Rechannelling Approach instead of Buffer Approach (Reserves, IMF, swap lines) Solution for root cause 42