DP7449 A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds
|Author(s):||Christopher D Carroll, Olivier Jeanne|
|Publication Date:||September 2009|
|Keyword(s):||Buffer Stock Saving, Capital Flows, Foreign Exchange Reserves, Net Foreign Assets, Small Open Economy, Sovereign Wealth Funds|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7449|
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.