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

36 Pages Posted: 15 Oct 2009

See all articles by Olivier Jeanne

Olivier Jeanne

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

Christopher D. Carroll

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

Multiple version iconThere are 3 versions of this paper

Date Written: October 14, 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, Net Foreign Assets, Sovereign Wealth Funds, Foreign Exchange Reserves, Small Open Economy

JEL Classification: C61

Suggested Citation

Jeanne, Olivier and Carroll, Christopher D., A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds (October 14, 2009). Peterson Institute for International Economics Working Paper No. 09-10, Available at SSRN: https://ssrn.com/abstract=1488965 or http://dx.doi.org/10.2139/ssrn.1488965

Olivier Jeanne (Contact Author)

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Christopher D. Carroll

Johns Hopkins University - Department of Economics ( email )

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