Uninsurable income risk and the welfare effects of reducing global imbalances

Ayşe Dur, Andrew Glover and Jacek Rothert

European Economic Review, 2025, vol. 179, issue C

Abstract: We study the welfare effect of policies that balance net foreign assets when households face uninsurable income risk and borrowing constraints. Subsidizing savings in debtor economies balances net foreign assets and raises the welfare of almost all citizens by increasing world capital and raising wages: in the presence of uninsurable income risk, higher wages create a positive pecuniary externality that raises welfare for low-wealth households. The same balancing of net foreign assets is achieved by discouraging savings in lender economies. However, this policy hurts most households by reducing global capital. These results suggest that balancing global imbalances may be a positive byproduct of raising investment rates, especially in debtor countries.

Keywords: Global imbalances; Incomplete markets; Heterogeneity (search for similar items in EconPapers)
JEL-codes: E2 E44 F32 F36 F4 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:179:y:2025:i:c:s0014292125001540

DOI: 10.1016/j.euroecorev.2025.105104

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