Working Paper: NBER ID: w15228
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: precautionary saving; foreign assets; capital flows; economic growth
JEL Codes: C61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased productivity growth (O49) | greater capital outflows (F32) |
| decrease in desired level of wealth in the rest of the world (F69) | negative impact on global capital stock and real wages (F62) |
| higher unemployment risk (J64) | increased target level of precautionary wealth (E21) |