Foreign Ownership of U.S. Safe Assets: Good or Bad?
Sydney Ludvigson (),
Stijn Van Nieuwerburgh and
Additional contact information
Jack Favilukis: London School of Economics
No 297, 2012 Meeting Papers from Society for Economic Dynamics
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). 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 higher asset values that accompany a capital inflow. In some states, the youngest working-age households and the oldest retired households would be willing to give up 1.5-1.7% of lifetime consumption in order to avoid just one year of a typical annual decline in foreign holdings of the safe asset. Middle-aged households could benefit from an outflow, but they do so by an amount that is typically one-tenth of the magnitude of the losses to the youngest and oldest households. Under the veil of ignorance, a newborn would be willing to give up over 11% of lifetime consumption to avoid a large capital outflow.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Working Paper: Foreign Ownership of U.S. Safe Assets: Good or Bad? (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:297
Access Statistics for this paper
More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().