@workingpaper {124071, title = {A Global Safe Asset From and For Emerging Economies}, year = {Working Paper}, abstract = {This paper examines international capital flows induced by flight-to-safety and proposes a new global safe asset.\ In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and fire-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond{\textquoteright}s safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the {\textquoteleft}{\textquoteleft}buffer approach{\textquotedblright} international reserve holding reduces the severity of a crisis. In the {\textquoteleft}{\textquoteleft}rechannelling approach{\textquoteright}{\textquoteright} flight-to-safety capital flows are rechannelled from international cross-border flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.}, author = {Markus K. Brunnermeier and Lunyang Huang} }