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http://hdl.handle.net/2451/31435
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| Title: | Foreign Ownership of U.S. Safe Assets: Good or Bad? |
| Authors: | Nieuwerburgh, Stijn Van
Ludvigson, Sydney C.
Favilukis, Jack |
| Issue Date: | 9-Jan-2012 |
| Series/Report no.: | FIN-11-057 |
| 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. This paper
analyzes the welfare consequences of these fluctuations in international
capital flows in a two-sector general equilibrium model with uninsurable
idiosyncratic and aggregate risks. The model implies that the young
benefit from a capital inflow due to lower interest rates, which reduce
the costs of home ownership and of borrowing against higher expected
future income. Middle-aged savers are hurt because they are crowded out
of the safe bond market and exposed to greater systematic risk in equity
and housing markets. Although they are partially compensated for this in
equilibrium by higher risk premia, they still suffer from lower expected
rates of return on their savings. By contrast, retired individuals, who
are drawing down assets and who receive social security income that is
least sensitive to the current aggregate state, benefit handsomely from
the rise in asset values that accompanies a capital inflow. Under the
"veil of ignorance," newborns gain from foreign purchases of
the safe asset and would be willing to forgo up to 1% of lifetime
consumption in order to avoid a large capital outflow. |
| URI: | http://hdl.handle.net/2451/31435 |
| Appears in Collections: | Finance Working Papers
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