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Asset Prices and Aggregate Demand in a "Covid-19" Shock : A Model of Endogenous Risk Intolerance and Lsaps

Caballero, Ricardo J. - 2020

In this paper we: (i) provide a model of the endogenous risk intolerance and severe aggregate demand contractions … addressing these contractions. The key mechanism stems from heterogeneous risk tolerance: as a recessionary shock hits the … economy and brings down asset prices, risk-tolerant agents' wealth share declines and their leverage rises endogenously. This …

Persistent link: https://www.econbiz.de/10012835752

The "Other" Imbalance and the Financial Crisis

Caballero, Ricardo J. - 2010

explicitly absorb a larger share of the systemic risk. The options for doing this range from surplus countries rebalancing their … securitization industry while removing the systemic risk from the banks' balance sheets. Such public-private solutions could be …

Persistent link: https://www.econbiz.de/10013149302

A Model of the Safe Asset Mechanism (Sam) : Safety Traps and Economic Policy

Caballero, Ricardo J. - 2013

The global economy has a chronic shortage of safe assets which lies behind many recent macroeconomic imbalances. This paper provides a simple model of the Safe Asset Mechanism (SAM), its recessionary safety traps, and its policy antidotes. Safety traps share many common features with...

Persistent link: https://www.econbiz.de/10013087881

Carry Trade and Systemic Risk : Why are FX Options so Cheap?

Caballero, Ricardo J. - 2013

strategies yield low systemic-risk-adjusted returns. In particular, we show that carry trade returns are highly correlated with … compensation for systemic risk. We show that this result stems from the fact that the corresponding portfolio of exchange rate …

Persistent link: https://www.econbiz.de/10013089284

Monetary Policy and Asset Price Overshooting : A Rationale for the Wall/Main Street Disconnect

Caballero, Ricardo J. - 2020

We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the...

Persistent link: https://www.econbiz.de/10012824916

A "Vertical" Analysis of Crises and Intervention : Fear of Floating and Ex-Ante Problems

Caballero, Ricardo J.; Krishnamurthy, Arvind - 2021

Emerging economies are prone to crises triggered by external shocks. During these crises, should the central bank stabilize the currency or domestic interest rates? If the choice is outside the central bank's control, as in a currency board, are there good policy substitutes? We argue that these...

Persistent link: https://www.econbiz.de/10013219686

Inflation Targeting and Sudden Stops

Caballero, Ricardo J.; Krishnamurthy, Arvind - 2021

Emerging economies experience sudden stops in capital inflows. As we have argued in Caballero and Krishnamurthy (2002), having access to monetary policy during these sudden stops is useful, but mostly for insurance' rather than for aggregate demand reasons. In this environment, a central bank...

Persistent link: https://www.econbiz.de/10013237236

International Liquidity Illusion : On the Risks of Sterilization

Caballero, Ricardo J.; Krishnamurthy, Arvind - 2021

During the booms that precede crises in emerging economies, policymakers often struggle to limit capital flows and their expansionary consequences. The main policy tool for this task is a sterilization of capital inflows - essentially a swap of international reserves for public bonds. Despite...

Persistent link: https://www.econbiz.de/10013210648

International Liquidity Management : Sterilization Policy in Illiquid Financial Markets

Caballero, Ricardo J.; Krishnamurthy, Arvind - 2021

the implementation and effectiveness of this policy via sterilization. The greatest risk of policy arises in situations …

Persistent link: https://www.econbiz.de/10013245510

Creative Destruction and Development : Institutions, Crises, and Restructuring

Caballero, Ricardo J.; Hammour, Mohamad L. - 2021

There is increasing empirical evidence that creative destruction, driven by experimentation and the adoption of new products and processes when investment is sunk, is a core mechanism of development. Obstacles to this process are likely to be obstacles to the progress in standards of living....

Persistent link: https://www.econbiz.de/10013311627