NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Jack Favilukis, Sydney C. Ludvigson, Stijn Van Nieuwerburgh

NBER Working Paper No. 19917
Issued in February 2014
NBER Program(s):   AP   EFG   IFM

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 but a bane for others. 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 may benefit substantially from such capital inflows, but middle-aged savers may suffer from greater exposure to systematic risk in equity and housing markets. In some states, the youngest working-age households would be willing to forgo 0.20% of lifetime consumption, while the oldest retired households would be willing to forgo over 1%, 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 is willing to forego 2.7% of lifetime consumption to avoid a large capital outflow.

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Document Object Identifier (DOI): 10.3386/w19917

Forthcoming: Foreign Ownership of U.S. Safe Assets: Good or Bad?, Jack Favilukis, Sydney C. Ludvigson, Stijn Van Nieuwerburgh. in Sovereign Debt and Financial Crisis, Kalemli-Ozcan, Reinhart, and Rogoff. 2014

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