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A tractable model of precautionary reserves, net foreign assets, or sovereign wealth funds

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  • Carroll, Christopher D.
  • Jeanne, Olivier

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. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2009/15.

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Date of creation: 2009
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Handle: RePEc:zbw:cfswop:200915

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Keywords: Buffer Stock Saving; Net Foreign Assets; Sovereign Wealth Funds; Foreign Exchange Reserves; Small Open Economy Models;

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References

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  1. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc.
  2. Gregory Mankiw, 1995. "The Growth of Nations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 275-326.
  3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5644, C.E.P.R. Discussion Papers.
  4. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 194-209, July.
  5. Fabrizio Perri & Alessandra Fogli, 2007. "The "great moderation'' and the US external imbalance," 2007 Meeting Papers, Society for Economic Dynamics 41, Society for Economic Dynamics.
  6. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 341-355, June.
  7. Gourinchas, Pierre-Olivier & Jeanne, Olivier, 2007. "Capital Flows to Developing Countries: The Allocation Puzzle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6561, C.E.P.R. Discussion Papers.
  8. Marcos Chamon & Eswar Prasad, 2008. "Why are Saving Rates of Urban Households in China Rising?," NBER Working Papers 14546, National Bureau of Economic Research, Inc.
  9. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5573, C.E.P.R. Discussion Papers.
  10. Maurice Obstfeld and Kenneth Rogoff., 1994. "The Intertemporal Approach to the Current Account," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C94-044, University of California at Berkeley.
  11. Jonathan David Ostry & Atish R. Ghosh, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
  12. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," NBER Working Papers 13619, National Bureau of Economic Research, Inc.
  13. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 40(1), pages 133-192, June.
  14. Hausmann, Ricardo & Pritchett, Lant & Rodrik, Dani, 2004. "Growth Accelerations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4538, C.E.P.R. Discussion Papers.
  15. Damiano Sandri, 2014. "Growth and Capital Flows with Risky Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 102-23, July.
  16. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(555), pages 905-930, 09.
  17. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  18. Christopher D. Carroll, 2004. "Theoretical Foundations of Buffer Stock Saving," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 517, The Johns Hopkins University,Department of Economics.
  19. Carroll, Christopher D. & Toche, Patrick, 2009. "A tractable model of buffer stock saving," CFS Working Paper Series 2009/14, Center for Financial Studies (CFS).
  20. Christopher Carroll, 2002. "'Risky Habits' and the Marginal Propensity to Consume Out Of Permanent Income," Computing in Economics and Finance 2002, Society for Computational Economics 42, Society for Computational Economics.
  21. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, Elsevier, vol. 87(2), pages 267-272, May.
  22. Norman Loayza & Klaus Schmidt-Hebbel & Luis Servén, 2000. "What Drives Private Saving Across the World?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 165-181, May.
  23. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  24. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
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