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Saturday, August 1, 2020 | History

2 edition of Financial system risk and flight to quality found in the catalog.

Financial system risk and flight to quality

by Ricardo J. Caballero

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  • 1 Currently reading

Published by Massachusetts Institute of Technology, Dept. of Economics in Cambridge, MA .
Written in English


About the Edition

We present a model of flight to quality episodes that emphasizes financial system risk and the Knightian uncertainty surrounding these episodes. In the model, agents are uncertain about the probability distribution of shocks in markets different from theirs, treating such uncertainty as Knightian. Aversion to this uncertainty generates demand for safe financial claims. It also leads agents to require financial intermediaries to lock-up capital to cover their own markets" shocks in a manner that is robust to uncertainty over other markets. These actions are wasteful in the aggregate and can trigger a financial accelerator. A lender of last resort can unlock private capital markets to stabilize the economy during these episodes by committing to intervene should conditions worsen. Keywords: Locked collateral, flight to quality, insurance, risk premia, financial intermediaries, lender of last resort, private sector multiplier, collateral shocks, robust control. JEL Classifications: E30, E44, E5, F34, G1, G21, G22, G28.

Edition Notes

StatementRicardo J. Caballero [and] Arvind Krishnamurthy
SeriesWorking paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 05-31, Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 05-31.
ContributionsKrishnamurthy, Arvind, Massachusetts Institute of Technology. Dept. of Economics
The Physical Object
Pagination38, [1] p. :
Number of Pages38
ID Numbers
Open LibraryOL24641662M
OCLC/WorldCa64232419

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Financial system risk and flight to quality by Ricardo J. Caballero Download PDF EPUB FB2

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Caballero Arvind Krishnamurthy∗ This draft: Septem Abstract We present a model of flight to quality episodes that emphasizes financial system risk and the Knigh-tian uncertainty surrounding these episodes.

In the model, agents are uncertain about the probab ilityCited by: Financial System Risk and Flight to Quality Ricardo J. Caballero Arvind Krishnamurthy∗ This draft: Octo Abstract We present a model of flight to quality episodes that emphasizes financial system risk and the Knigh-tian uncertainty surrounding these episodes.

In the model, agents are uncertain about the probab ility. A flight-to-quality, or flight-to-safety, is a financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments, such as gold and other precious metals.

This is considered a sign of fear in the marketplace, as investors seek less risk in exchange for lower profits. Flight-to-quality is usually accompanied by an.

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