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Uninsurable income risk and the welfare effects of reducing global imbalances

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  • Dur, Ayşe
  • Glover, Andrew
  • Rothert, Jacek

Abstract

We study the welfare effect of policies that balance net foreign assets when households face uninsurable income risk and borrowing constraints. Subsidizing savings in debtor economies balances net foreign assets and raises the welfare of almost all citizens by increasing world capital and raising wages: in the presence of uninsurable income risk, higher wages create a positive pecuniary externality that raises welfare for low-wealth households. The same balancing of net foreign assets is achieved by discouraging savings in lender economies. However, this policy hurts most households by reducing global capital. These results suggest that balancing global imbalances may be a positive byproduct of raising investment rates, especially in debtor countries.

Suggested Citation

  • Dur, Ayşe & Glover, Andrew & Rothert, Jacek, 2025. "Uninsurable income risk and the welfare effects of reducing global imbalances," European Economic Review, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:eecrev:v:179:y:2025:i:c:s0014292125001540
    DOI: 10.1016/j.euroecorev.2025.105104
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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