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A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds

  • Christopher D. Carroll

    ()

    (Johns Hopkins University)

  • Olivier Jeanne

    ()

    (Peterson Institute for International Economics)

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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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP09-10.

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Date of creation: Oct 2009
Handle: RePEc:iie:wpaper:wp09-10
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  1. Pierre-Olivier & Olivier Jeanne, 2009. "Capital Flows to Developing Countries: The Allocation Puzzle," Working Paper Series WP09-12, Peterson Institute for International Economics.
  2. Christopher D. Carroll & David N. Weil, 1993. "Saving and Growth: A Reinterpretation," NBER Working Papers 4470, National Bureau of Economic Research, Inc.
  3. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," NBER Working Papers 13619, National Bureau of Economic Research, Inc.
  4. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
  5. Damiano Sandri, 2010. "Growth and Capital Flows with Risky Entrepreneurship," IMF Working Papers 10/37, International Monetary Fund.
  6. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  7. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
  8. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  9. Fogli, Alessandra & Perri, Fabrizio, 2006. "The 'Great Moderation' and the US External Imbalance," CEPR Discussion Papers 6010, C.E.P.R. Discussion Papers.
  10. 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.
  11. Marcos d Chamon & Eswar S Prasad, 2008. "Why are Saving Rates of Urban Households in China Rising?," IMF Working Papers 08/145, International Monetary Fund.
  12. Toche, Patrick, 2005. "A tractable model of precautionary saving in continuous time," Economics Letters, Elsevier, vol. 87(2), pages 267-272, May.
  13. Maurice Obstfeld & Kenneth Rogoff, 1994. "The Intertemporal Approach to the Current Account," NBER Working Papers 4893, National Bureau of Economic Research, Inc.
  14. Hausmann, Ricardo & Pritchett, Lant & Rodrik, Dani, 2004. "Growth Accelerations," Working Paper Series rwp04-030, Harvard University, John F. Kennedy School of Government.
  15. Christopher D. Carroll & Patrick Toche, 2009. "A Tractable Model of Buffer Stock Saving," NBER Working Papers 15265, National Bureau of Economic Research, Inc.
  16. Jonathan David Ostry & Atish R. Ghosh, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
  17. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," NBER Working Papers 13123, National Bureau of Economic Research, Inc.
  18. Christopher D. Carroll, 2009. "Theoretical Foundations of Buffer Stock Saving," 2009 Meeting Papers 210, Society for Economic Dynamics.
  19. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  20. Christopher Carroll, 2002. "'Risky Habits' and the Marginal Propensity to Consume Out Of Permanent Income," Computing in Economics and Finance 2002 42, Society for Computational Economics.
  21. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
  22. N. Gregory Mankiw, 1995. "The Growth of Nations," Harvard Institute of Economic Research Working Papers 1732, Harvard - Institute of Economic Research.
  23. 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.
  24. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Post-Print halshs-00754518, HAL.
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