Foreign Ownership of U.S. Safe Assets: Good or Bad?

70 Pages Posted: 13 Jan 2012 Last revised: 10 Feb 2014

See all articles by Jack Y Favilukis

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Sydney C. Ludvigson

New York University - Department of Economics; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); New York University Stern School of Business, Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 9, 2014

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. We argue that these trends in international capital flows are likely to be a boon for some (by a lot) but a bane for others (by less). Conversely, a sell-off of foreign government holdings of U.S. safe assets could be tremendously costly for some individuals, while the possible benefits to others are several times smaller. In a general equilibrium lifecycle model with aggregate and idiosyncratic risks, we find that the young and oldest households are likely to benefit substantially from a capital inflow, but middle-aged savers may suffer because they are crowded out of the safe bond market and exposed to greater systematic risk in equity and housing markets. In some states, the youngest working-age households would be willing to give up 0.20% while the oldest retired households would be willing to give up over 1% of lifetime consumption in order to avoid just one year of a typical annual decline in foreign holdings of the safe asset. By contrast, middle-aged savers could benefit from an outflow. Under the veil of ignorance, a newborn in the lowest wealth quantile would be willing to give up 2.7% of lifetime consumption to avoid a large capital outflow.

Keywords: international capital flows, international risk sharing, foreign purchases of safe assets

JEL Classification: G11, G12, E44, E21

Suggested Citation

Favilukis, Jack Y and Ludvigson, Sydney C. and Van Nieuwerburgh, Stijn, Foreign Ownership of U.S. Safe Assets: Good or Bad? (February 9, 2014). NYU Working Paper No. 2451/31435. Available at SSRN: https://ssrn.com/abstract=1983093

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Sydney C. Ludvigson

New York University - Department of Economics ( email )

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New York, NY 10012
United States
212-998-8927 (Phone)
212-995-4186 (Fax)

HOME PAGE: http://www.econ.nyu.edu/user/ludvigsons/

National Bureau of Economic Research (NBER)

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Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

3022 Broadway
Uris Hall 809
New York, NY New York 10027
United States

HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

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