OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
International Capital Mobility and Financial Fragility - Part 2. The Demand for Safe Assets in Emerging Economies and Global Imbalances
New Empirical Evidence
Mismatches between the supply and the demand of safe financial assets in fast-growing emerging
countries have been singled out by economic theory as drivers of international capital flows and,
ultimately, global current account imbalances. This paper assesses empirically the contribution of the
search for safe assets to the size and composition of emerging countries’ international asset portfolios.
Excess demand for safe assets in financially less-developed countries would imply that these countries
hold disproportionately high shares of their total portfolios in foreign assets. Moreover, financially lessdeveloped
countries would be expected to hold disproportionately high shares of their foreign portfolios in
financially highly-developed countries, as ostensibly safe assets are predominantly produced by the latter.
This paper finds little empirical support for these predictions. Financially less-developed countries allocate
a larger proportion of their total holdings to domestic assets. Even when focusing on less-developed
countries’ foreign portfolios, there is no evidence of a general bias toward the assets of financially highlydeveloped
countries. Overall, asset mismatches do not appear to be significant drivers of asset allocation of
financially less-developed countries.
Keywords: foreign investment, asset mismatches, financial development, capital flows, global imbalances, home bias
JEL:
F4: International Economics / Macroeconomic Aspects of International Trade and Finance;
F3: International Economics / International Finance;
G1: Financial Economics / General Financial Markets;
F2: International Economics / International Factor Movements and International Business
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