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

39 Pages Posted: 7 Oct 2009

See all articles by Christopher D. Carroll

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

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Date Written: September 2009

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.

Keywords: Buffer Stock Saving, Capital Flows, Foreign Exchange Reserves, Net Foreign Assets, Small Open Economy, Sovereign Wealth Funds

JEL Classification: C61, F3

Suggested Citation

Carroll, Christopher D. and Jeanne, Olivier, A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds (September 2009). CEPR Discussion Paper No. DP7449, Available at SSRN: https://ssrn.com/abstract=1484482

Christopher D. Carroll

Johns Hopkins University - Department of Economics ( email )

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Olivier Jeanne (Contact Author)

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Centre for Economic Policy Research (CEPR)

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