Working Paper: CEPR ID: DP7449
Authors: Christopher D. Carroll; Olivier Jeanne
Abstract: We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive, deriving a convenient formula for the economy's target value of assets. The target is the level of assets that balances impatience, prudence, risk, intertemporal substitution, and the rate of return. We use the model to shed light on two topical questions: The 'upstream' flows of capital from developing countries to advanced countries, and the long-run impact of resorbing global financial imbalances.
Keywords: Buffer Stock Saving; Capital Flows; Foreign Exchange Reserves; Net Foreign Assets; Small Open Economy; Sovereign Wealth Funds
JEL Codes: C61; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| precautionary motive for saving in developing countries (D14) | significant upstream capital flows to advanced economies (F32) |
| increase in idiosyncratic risk (G19) | higher capital outflows (F32) |
| economic growth in developing countries (O54) | heightened idiosyncratic risk (D80) |
| heightened idiosyncratic risk (D80) | increase in demand for foreign assets (G15) |
| economic growth (O49) | export capital rather than import it (F10) |
| rise in idiosyncratic risk (G19) | decrease in desired level of foreign assets (F32) |
| decrease in desired level of foreign assets (F32) | negative impact on global capital stock (F69) |
| economic growth (O49) | capital flows (F32) |