not flowing to poor countries and is thus not enhancing their development. the gross amount of capital flowing each year to emerging - market economies increased dramatically in the 1990s and is now more than $ 600 billion. that amount may sound like a lot, but it is only oneseventh of total international capital flows excluding official reserves. the situation is even more remarkable when one adds into the picture the capital flows out of developing countries, especially the governmental acquisition of international reserves ; then we see that emerging - market economies have, on net, actually been sending capital to rich countries. the united states is currently running very large trade and current account deficits - more than $ 800 billion - because americans are buying more goods and services from abroad than they are selling overseas. these deficits are being financed by the foreign acquisition of u. s. assets, especially bonds, with emerging - market economies providing the united states with about $ 300 billion per year. the chinese government, for example, has accumulated nearly $ 1 trillion of foreign assets ; much of this is invested in the united states, and china is now one of the largest holders of u. s. treasury securities in the world. also remarkable is that capital flows from rich countries to developing countries relative to total capital are far smaller than they were in the first age of globalization, during the late nineteenth and early twentieth centuries. by 1914, about half of the stock of capital in argentina was supplied by rich foreign countries, particularly the united kingdom. today, less than 6 percent of argentine capital has been supplied by foreigners. and this change in the pattern of capital flows has not been confined to argentina. as nobel laureate robert lucas has pointed out, this feature of international capital flows is a paradox : why doesn't capital flow from rich to poor countries? we know that labor is cheap in poor countries, and so we might think that capital would be especially productive there. just think of how hugely profitable a factory might be in a country where wages are one - tenth of those in the united states. capital should, therefore, have extremely high returns in such countries, and we should expect massive flows of capital from rich countries ( where the returns on capital should be relatively low ) to poor countries ( where they should be far higher ). in fact, there has been a big increase in the amount of capital moving to emerging - market economies in recent years, but capital primarily still flows from one rich country to another, where the returns on capital are similar. thus

sufi 2018 ). financial exuberance can thus have severe negative implications, both at the individual and at the aggregate level. understanding the factors that prevent excessive financial risk seite 2 von 27 deutsche bundesbank, directorate general communications wilhelm - epstein - strasse 14, 60431 frankfurt am main, germany, tel : + 49 ( 0 ) 69 9566 3511 or 3512, fax : + 49 ( 0 ) 69 9566 3077 presse @ bundesbank. de, www. bundesbank. de reproduction permitted only if source is stated. taking and improve financial resilience is important. so what do we know about the links between financial literacy and financial stability? is financial literary a precondition for financial stability? and how do policy decisions that target micro - level incentives affect aggregate outcomes? financial literacy is an individual trait, related to the capability of individuals to deal with financial concepts, to take sound financial decisions, and to balance the risks and returns of these decisions. measures that mitigate the adverse effects of limited financial knowledge can take various forms, ranging from educational interventions to consumer protection legislation. policy interventions can be justified if they correct market failures, including externalities ( i. e. effects on third parties that are not consenting ), if exchanges take place without full information or knowledge, or if market power prevails ( tirole 2017, chapter 6 ). by contrast, analysing financial stability issues requires taking an aggregate perspective. risks to financial stability emerge if distress in parts of the financial system threatens the functioning of the entire financial system. when a financial system becomes impaired, there may be dire consequences for economic activity such as losses in output, resource misallocation, and social costs. hence, the ability of the financial system to perform its key macroeconomic functions is the focus of financial stability surveillance and, ultimately, policy. post - crisis, macroprudential policy has been established as a new policy field that explicitly targets financial stability. such macroprudential policies can take various forms, e. g. bank - based instruments that internalise systemic risk externalities or borrower - based instruments that allow imposing minimum standards for the granting of ( mortgage ) loans. in this paper, i will begin by discussing the links between financial literacy and financial stability. i will argue that financial ( il ) literacy is an important channel through which financial instabilities can arise. uninformed investors may take on excessive risk.