Working Paper: NBER ID: w19917
Authors: Jack Favilukis; Sydney C. Ludvigson; Stijn Van Nieuwerburgh
Abstract: The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. What are the welfare consequences to U.S. households of these trends, or of a reversal? In a lifecycle model with aggregate and idiosyncratic risks, the young and oldest households may benefit substantially from such capital inflows, but middle-aged savers may suffer from greater exposure to systematic risk in equity and housing markets. Under the veil of ignorance, a newborn in the lowest wealth quantile is willing to forego 2.7% of lifetime consumption to avoid a large capital outflow.
Keywords: Foreign Ownership; US Safe Assets; Welfare Consequences; Capital Inflows
JEL Codes: G1; G11; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign purchases of safe assets (G15) | decrease in risk-free interest rates (E43) |
| decrease in risk-free interest rates (E43) | boost output (E23) |
| decrease in risk-free interest rates (E43) | boost asset prices (G19) |
| foreign purchases of safe assets (G15) | boost output (Y60) |
| foreign purchases of safe assets (G15) | boost asset prices (G19) |
| decrease in risk-free interest rates (E43) | welfare gains for youngest households (I38) |
| decrease in risk-free interest rates (E43) | lower costs of home ownership (R21) |
| decrease in risk-free interest rates (E43) | increase expected future income (J17) |
| foreign purchases of safe assets (G15) | greater systematic risk for middle-aged savers (D14) |
| greater systematic risk for middle-aged savers (D14) | welfare losses (D69) |
| foreign purchases of safe assets (G15) | capital outflow (F21) |
| capital outflow (F21) | willingness to forego lifetime consumption (D15) |
| increases in asset values (G19) | benefits for retired individuals (J26) |
| foreign purchases of safe assets (G15) | lower expected returns on savings for middle-aged households (D14) |
| magnitude of effects (C90) | varies across wealth and income quintiles (D31) |