A Tractable Model of Precautionary Reserves, Net Foreign Assets, or - - PowerPoint PPT Presentation

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

Christopher Carroll and Olivier Jeanne

Johns Hopkins University

March 3, 2013

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Motivation

Three Hot Topics In International Macro: Huge Reserve Accumulation By Fast-Growing Developing Economies

China

Surprising “Upstream” Capital Flows: Developing → Rich Countries

China – Following Japan, Korea, Taiwan, Singapore, Hong Kong, ...

Sovereign Wealth Funds

Mainly Oil-Rich Countries

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Connection?

Precautionary Motives Commonly Cited In All Three Cases Our Model of Precautionary Net Foreign Assets:

• Tractable. Tractable! TRACTABLE!!!

The Natural Extension of the Ramsey Model Shows Eqbm Relation Between Precautionary, Other Motives

Two applications

Economic Growth and Capital Flows Impact of Reducing Global Financial Imbalances

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Literature

Aggregated Micro Model

“Real” microfoundations!

Builds on Toche (2005) Related: Fogli and Perri (2006), Mendoza, Quadrini, and Rios-Rull (2007), Sandri (2008) Other Approaches: Caballero, Farhi, and Gourinchas (2008)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Literature

Aggregated Micro Model

“Real” microfoundations!

Builds on Toche (2005) Related: Fogli and Perri (2006), Mendoza, Quadrini, and Rios-Rull (2007), Sandri (2008) Other Approaches: Caballero, Farhi, and Gourinchas (2008)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Literature

Aggregated Micro Model

“Real” microfoundations!

Builds on Toche (2005) Related: Fogli and Perri (2006), Mendoza, Quadrini, and Rios-Rull (2007), Sandri (2008) Other Approaches: Caballero, Farhi, and Gourinchas (2008)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Literature

Aggregated Micro Model

“Real” microfoundations!

Builds on Toche (2005) Related: Fogli and Perri (2006), Mendoza, Quadrini, and Rios-Rull (2007), Sandri (2008) Other Approaches: Caballero, Farhi, and Gourinchas (2008)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Literature

Aggregated Micro Model

“Real” microfoundations!

Builds on Toche (2005) Related: Fogli and Perri (2006), Mendoza, Quadrini, and Rios-Rull (2007), Sandri (2008) Other Approaches: Caballero, Farhi, and Gourinchas (2008)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Structure

Model Calibration and Simulation Applications

Growth and Capital Flows Complete World Knowledge (General Equilibrium)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Structure

Model Calibration and Simulation Applications

Growth and Capital Flows Complete World Knowledge (General Equilibrium)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Structure

Model Calibration and Simulation Applications

Growth and Capital Flows Complete World Knowledge (General Equilibrium)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Structure

Model Calibration and Simulation Applications

Growth and Capital Flows Complete World Knowledge (General Equilibrium)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Structure

Model Calibration and Simulation Applications

Growth and Capital Flows Complete World Knowledge (General Equilibrium)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Overview

Small Open Economy Balanced Growth Path With Population And Productivity Growth Accumulate Buffer Stock to Self-Insure Against Unemployment NFA: Aggregate Stock of Wealth Minus Domestic Capital Stock Closed-Form Solutions For Equilibrium

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Overview

Small Open Economy Balanced Growth Path With Population And Productivity Growth Accumulate Buffer Stock to Self-Insure Against Unemployment NFA: Aggregate Stock of Wealth Minus Domestic Capital Stock Closed-Form Solutions For Equilibrium

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Overview

Small Open Economy Balanced Growth Path With Population And Productivity Growth Accumulate Buffer Stock to Self-Insure Against Unemployment NFA: Aggregate Stock of Wealth Minus Domestic Capital Stock Closed-Form Solutions For Equilibrium

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Overview

Small Open Economy Balanced Growth Path With Population And Productivity Growth Accumulate Buffer Stock to Self-Insure Against Unemployment NFA: Aggregate Stock of Wealth Minus Domestic Capital Stock Closed-Form Solutions For Equilibrium

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Motivation Literature Structure Overview

Overview

Small Open Economy Balanced Growth Path With Population And Productivity Growth Accumulate Buffer Stock to Self-Insure Against Unemployment NFA: Aggregate Stock of Wealth Minus Domestic Capital Stock Closed-Form Solutions For Equilibrium

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Macroeconomic Assumptions

Domestic output is produced with the Cobb-Douglas function: Y Y Y t = K K K α

t (ztL

L Lt)1−α, (1) Labor productivity increases by G in every period, zt+1 = Gzt. (2) Capital perfectly mobile internationally,

≡1−δ

• +αY

Y Y t K K K t = R, (3) Capital-to-output ratio is constant and equal to, K K K Y Y Y = α R − . (4)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Macroeconomic Assumptions

Domestic output is produced with the Cobb-Douglas function: Y Y Y t = K K K α

t (ztL

L Lt)1−α, (1) Labor productivity increases by G in every period, zt+1 = Gzt. (2) Capital perfectly mobile internationally,

≡1−δ

• +αY

Y Y t K K K t = R, (3) Capital-to-output ratio is constant and equal to, K K K Y Y Y = α R − . (4)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Macroeconomic Assumptions

Domestic output is produced with the Cobb-Douglas function: Y Y Y t = K K K α

t (ztL

L Lt)1−α, (1) Labor productivity increases by G in every period, zt+1 = Gzt. (2) Capital perfectly mobile internationally,

≡1−δ

• +αY

Y Y t K K K t = R, (3) Capital-to-output ratio is constant and equal to, K K K Y Y Y = α R − . (4)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Macroeconomic Assumptions

Domestic output is produced with the Cobb-Douglas function: Y Y Y t = K K K α

t (ztL

L Lt)1−α, (1) Labor productivity increases by G in every period, zt+1 = Gzt. (2) Capital perfectly mobile internationally,

≡1−δ

• +αY

Y Y t K K K t = R, (3) Capital-to-output ratio is constant and equal to, K K K Y Y Y = α R − . (4)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

People and Populations

Each worker is part of a single ‘generation’ born at the same time Size of generation born at t : Ξt. Life Stages:

Employment Unemployment/Retirement Death

Transitions to unemployment and death are Poisson processes

Flow probabilities and D.

Employed and Unemployed Populations: Et = Ξt+1 Ξ −

• Ut

= Ξt+1 (Ξ − D)(Ξ − ).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Balanced Growth

Capital and output grow at constant rates Real wage grows by factor G in every period. Main variable of interest= N N Nt, the aggregate net foreign assets of the economy at the beginning of period t. N N Nt = B B Bt − K K K t. (5)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Balanced Growth

Capital and output grow at constant rates Real wage grows by factor G in every period. Main variable of interest= N N Nt, the aggregate net foreign assets of the economy at the beginning of period t. N N Nt = B B Bt − K K K t. (5)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Balanced Growth

Capital and output grow at constant rates Real wage grows by factor G in every period. Main variable of interest= N N Nt, the aggregate net foreign assets of the economy at the beginning of period t. N N Nt = B B Bt − K K K t. (5)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Budget constraint of individual: b b bt+1 R + c c ct = b b bt +

labor income

ξtℓtWt , (6) Worker’s labor supply ℓ grows by a factor X per period over his lifetime, ℓt = Xtℓ0, (7) For consumer who remains employed, labor income grows by Γ ≡ GX.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Budget constraint of individual: b b bt+1 R + c c ct = b b bt +

labor income

ξtℓtWt , (6) Worker’s labor supply ℓ grows by a factor X per period over his lifetime, ℓt = Xtℓ0, (7) For consumer who remains employed, labor income grows by Γ ≡ GX.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Budget constraint of individual: b b bt+1 R + c c ct = b b bt +

labor income

ξtℓtWt , (6) Worker’s labor supply ℓ grows by a factor X per period over his lifetime, ℓt = Xtℓ0, (7) For consumer who remains employed, labor income grows by Γ ≡ GX.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Unemployment: Complete and permanent destruction of h CRRA felicity u(•) = •1−ρ/(1 − ρ); geometric discounting at β Unemployed convert their wealth into annuities. Solution to the unemployed consumer’s optimization problem, c c cu

t

= κub b bt, where κ is the marginal propensity to consume, κu ≡ 1 − D(βR)1/ρ R .

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Unemployment: Complete and permanent destruction of h CRRA felicity u(•) = •1−ρ/(1 − ρ); geometric discounting at β Unemployed convert their wealth into annuities. Solution to the unemployed consumer’s optimization problem, c c cu

t

= κub b bt, where κ is the marginal propensity to consume, κu ≡ 1 − D(βR)1/ρ R .

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Unemployment: Complete and permanent destruction of h CRRA felicity u(•) = •1−ρ/(1 − ρ); geometric discounting at β Unemployed convert their wealth into annuities. Solution to the unemployed consumer’s optimization problem, c c cu

t

= κub b bt, where κ is the marginal propensity to consume, κu ≡ 1 − D(βR)1/ρ R .

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

Unemployment: Complete and permanent destruction of h CRRA felicity u(•) = •1−ρ/(1 − ρ); geometric discounting at β Unemployed convert their wealth into annuities. Solution to the unemployed consumer’s optimization problem, c c cu

t

= κub b bt, where κ is the marginal propensity to consume, κu ≡ 1 − D(βR)1/ρ R .

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

‘Growth impatience condition’: Þ Þ ÞΓ ≡ (βR)1/ρ Γ < 1 necessary for finite target ratio of wealth to income (Carroll (2011)) Defining nonbold variables as, e.g., ce

t = c

c ce

t /(Wtℓt), we get

be

t+1 = (R/Γ) (be t − ce t + 1) .

(8) ce

t+1 = Þ

Þ ÞΓ 1/ρce

t

• 1 −

Þ Þ ÞΓ κu ce

t

R/Γ(be

t − ce t + 1)

ρ−1/ρ . (9) Saddle-point stable dynamics.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

‘Growth impatience condition’: Þ Þ ÞΓ ≡ (βR)1/ρ Γ < 1 necessary for finite target ratio of wealth to income (Carroll (2011)) Defining nonbold variables as, e.g., ce

t = c

c ce

t /(Wtℓt), we get

be

t+1 = (R/Γ) (be t − ce t + 1) .

(8) ce

t+1 = Þ

Þ ÞΓ 1/ρce

t

• 1 −

Þ Þ ÞΓ κu ce

t

R/Γ(be

t − ce t + 1)

ρ−1/ρ . (9) Saddle-point stable dynamics.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The microeconomic consumer’s problem

‘Growth impatience condition’: Þ Þ ÞΓ ≡ (βR)1/ρ Γ < 1 necessary for finite target ratio of wealth to income (Carroll (2011)) Defining nonbold variables as, e.g., ce

t = c

c ce

t /(Wtℓt), we get

be

t+1 = (R/Γ) (be t − ce t + 1) .

(8) ce

t+1 = Þ

Þ ÞΓ 1/ρce

t

• 1 −

Þ Þ ÞΓ κu ce

t

R/Γ(be

t − ce t + 1)

ρ−1/ρ . (9) Saddle-point stable dynamics.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Phase Diagram

• Wealth ratio

Consumption Ratio

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The Growth Impatience Condition

Target wealth-to-income ratio: impatience vs prudence. Closed-form solution for the target wealth-to-income ratio ˇ b =   Γ R − 1 + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ



−1

. (10) ∂ˇ b ∂ > 0, ∂ˇ b ∂β > 0, ∂ˇ b ∂Γ < 0. (11) ∂ˇ b ∂ρ > 0. (12) The response of ˇ b to R is ambiguous.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The Growth Impatience Condition

Target wealth-to-income ratio: impatience vs prudence. Closed-form solution for the target wealth-to-income ratio ˇ b =   Γ R − 1 + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ



−1

. (10) ∂ˇ b ∂ > 0, ∂ˇ b ∂β > 0, ∂ˇ b ∂Γ < 0. (11) ∂ˇ b ∂ρ > 0. (12) The response of ˇ b to R is ambiguous.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The Growth Impatience Condition

Target wealth-to-income ratio: impatience vs prudence. Closed-form solution for the target wealth-to-income ratio ˇ b =   Γ R − 1 + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ



−1

. (10) ∂ˇ b ∂ > 0, ∂ˇ b ∂β > 0, ∂ˇ b ∂Γ < 0. (11) ∂ˇ b ∂ρ > 0. (12) The response of ˇ b to R is ambiguous.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

The Growth Impatience Condition

Target wealth-to-income ratio: impatience vs prudence. Closed-form solution for the target wealth-to-income ratio ˇ b =   Γ R − 1 + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ



−1

. (10) ∂ˇ b ∂ > 0, ∂ˇ b ∂β > 0, ∂ˇ b ∂Γ < 0. (11) ∂ˇ b ∂ρ > 0. (12) The response of ˇ b to R is ambiguous.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Foreign Assets

Ratio of employed workers’ wealth to output, Be

t = B

B Be

t

Y Y Y t = (1 − α)    1 − X Ξ

• ≡Λ

   

+∞

• n=0

Λnbe

t,t−n,

(13) where Λ is the factor by which the share of a generation in total labor supply shrinks every period. The Level of Unemployed Workers’ Wealth is B B Bu

t+1 = R(1 − κu)B

B Bu

t + B

B Be

t+1.

(14)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Foreign Assets

Ratio of employed workers’ wealth to output, Be

t = B

B Be

t

Y Y Y t = (1 − α)    1 − X Ξ

• ≡Λ

   

+∞

• n=0

Λnbe

t,t−n,

(13) where Λ is the factor by which the share of a generation in total labor supply shrinks every period. The Level of Unemployed Workers’ Wealth is B B Bu

t+1 = R(1 − κu)B

B Bu

t + B

B Be

t+1.

(14)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Foreign Assets (cont)

Steady state ratio of net foreign assets to GDP N N N Y Y Y = ΞG R

• 1 +

ΞG ΞG − D(βR)1/ρ B B Be Y Y Y − ΞG

• α

R −

• .

(15) Depends on Employed Workers’ Target Savings

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Foreign Assets (cont)

Steady state ratio of net foreign assets to GDP N N N Y Y Y = ΞG R

• 1 +

ΞG ΞG − D(βR)1/ρ B B Be Y Y Y − ΞG

• α

R −

• .

(15) Depends on Employed Workers’ Target Savings

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

‘Stakes’

Model with no stakes Be = B B Be Y Y Y = (1 − α)(1 − Λ)

+∞

• n=0

Λnbe(n). (16) Model with stakes yielding a representative agent ˇ ˇ B = B B Be Y Y Y = (1 − α)ˇ ˇ b. (17) where ˇ ˇ b =   Γ R − 1 2 − Λ + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ



−1

(18)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

‘Stakes’

Model with no stakes Be = B B Be Y Y Y = (1 − α)(1 − Λ)

+∞

• n=0

Λnbe(n). (16) Model with stakes yielding a representative agent ˇ ˇ B = B B Be Y Y Y = (1 − α)ˇ ˇ b. (17) where ˇ ˇ b =   Γ R − 1 2 − Λ + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ



−1

(18)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Advantages Of Model With Stakes

Closed-form solution for steady state Simple to characterize transition dynamics

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Macroeconomy People Balanced Growth The Microeconomic Problem Foreign Assets

Advantages Of Model With Stakes

Closed-form solution for steady state Simple to characterize transition dynamics

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Calibration and Simulation

Table 1 α δ Ξ G R β−1 Φ

• ρ

d 0.3 0.06 1.01 1.04 1.04 1.04 1.01 0.025 2 0.05 N N N/Y Y Y = 0.17 in the model with no stakes N N N/Y Y Y = 0.79 in the model with stakes

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Calibration and Simulation

Table 1 α δ Ξ G R β−1 Φ

• ρ

d 0.3 0.06 1.01 1.04 1.04 1.04 1.01 0.025 2 0.05 N N N/Y Y Y = 0.17 in the model with no stakes N N N/Y Y Y = 0.79 in the model with stakes

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Paths

Consumption Wealth 20 40 60 80 100 1 2 3 4 5 Time Consumption and wealth ratios, and

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Sensitivity analysis

3 2 1 1 2 3 Risk aversion, Ρ NY 0.02 0.03 0.04 0.05 2 2 4 Unemployment probability, NY With stakes No stakes 1.04 1.06 1.08 1.10 1.5 1.0 0.5 0.0 0.5 1.0 1.5 Productivity growth, G NY 1.00 1.01 1.02 1.03 1.04 1.05 3 2 1 1 2 Interest factor, R NY

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Social Insurance

Many countries have social transfers to unemployed/retired New assumption: labor income tax on the employed in order to finance transfers to the unemployed. Unemployed receive transfer whose value is a multiple ς of the labor income that they would have received if they had remained employed. New formula for target wealth-to-income ratio. Going through the same steps as before, we get ` ˇ b(ς) =   1 − ς   Ξ + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ

    ˇ ˇ b, (19)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Social Insurance

Many countries have social transfers to unemployed/retired New assumption: labor income tax on the employed in order to finance transfers to the unemployed. Unemployed receive transfer whose value is a multiple ς of the labor income that they would have received if they had remained employed. New formula for target wealth-to-income ratio. Going through the same steps as before, we get ` ˇ b(ς) =   1 − ς   Ξ + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ

    ˇ ˇ b, (19)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Social Insurance

Many countries have social transfers to unemployed/retired New assumption: labor income tax on the employed in order to finance transfers to the unemployed. Unemployed receive transfer whose value is a multiple ς of the labor income that they would have received if they had remained employed. New formula for target wealth-to-income ratio. Going through the same steps as before, we get ` ˇ b(ς) =   1 − ς   Ξ + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ

    ˇ ˇ b, (19)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Social Insurance

Many countries have social transfers to unemployed/retired New assumption: labor income tax on the employed in order to finance transfers to the unemployed. Unemployed receive transfer whose value is a multiple ς of the labor income that they would have received if they had remained employed. New formula for target wealth-to-income ratio. Going through the same steps as before, we get ` ˇ b(ς) =   1 − ς   Ξ + κu

• 1 + Þ

Þ Þ−ρ

Γ

− 1

• 1/ρ

    ˇ ˇ b, (19)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Parameter Values Paths Sensitivity Analysis Social Insurance

Social insurance

1 2 3 4 5 4 3 2 1 1 Social insurance benefit in years of wage, ̣ Foreign assetsGDP, NY

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

Growth And Saving

Theory: Good Growth Prospects → Should Borrow to Invest Data: Fast-Growing Countries Export Capital

Carroll and Weil (1994); Loayza, Schmidt-Hebbel, and Serv´ en (2000); Attanasio, Picci, and Scorcu (2000); Gourinchas and Jeanne, 2007, Prasad, Rajan and Subramanian (2007); Sandri (2008)

Can this model shed light on this puzzle? Yes, if growth take-off entails idiosyncratic risk (both G and go up).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

Growth And Saving

Theory: Good Growth Prospects → Should Borrow to Invest Data: Fast-Growing Countries Export Capital

Carroll and Weil (1994); Loayza, Schmidt-Hebbel, and Serv´ en (2000); Attanasio, Picci, and Scorcu (2000); Gourinchas and Jeanne, 2007, Prasad, Rajan and Subramanian (2007); Sandri (2008)

Can this model shed light on this puzzle? Yes, if growth take-off entails idiosyncratic risk (both G and go up).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

Growth And Saving

Theory: Good Growth Prospects → Should Borrow to Invest Data: Fast-Growing Countries Export Capital

Carroll and Weil (1994); Loayza, Schmidt-Hebbel, and Serv´ en (2000); Attanasio, Picci, and Scorcu (2000); Gourinchas and Jeanne, 2007, Prasad, Rajan and Subramanian (2007); Sandri (2008)

Can this model shed light on this puzzle? Yes, if growth take-off entails idiosyncratic risk (both G and go up).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

Growth And Saving

Theory: Good Growth Prospects → Should Borrow to Invest Data: Fast-Growing Countries Export Capital

Carroll and Weil (1994); Loayza, Schmidt-Hebbel, and Serv´ en (2000); Attanasio, Picci, and Scorcu (2000); Gourinchas and Jeanne, 2007, Prasad, Rajan and Subramanian (2007); Sandri (2008)

Can this model shed light on this puzzle? Yes, if growth take-off entails idiosyncratic risk (both G and go up).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

Growth And Saving

Theory: Good Growth Prospects → Should Borrow to Invest Data: Fast-Growing Countries Export Capital

Carroll and Weil (1994); Loayza, Schmidt-Hebbel, and Serv´ en (2000); Attanasio, Picci, and Scorcu (2000); Gourinchas and Jeanne, 2007, Prasad, Rajan and Subramanian (2007); Sandri (2008)

Can this model shed light on this puzzle? Yes, if growth take-off entails idiosyncratic risk (both G and go up).

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

Growth and capital flows

Increasing risk Constant risk A B C 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 0.20 0.15 0.10 0.05 0.00 0.05 Productivity growth factor, G Capital outflows to GDP, NtNt1Yt

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

World General Equilibrium

Small economy assumption not appropriate to study global savings glut or adjustment of global financial imbalances. Study steady state equilibria in two-country extension of the model. Global interest rate R endogenous N N Nh + N N Nf = 0, (20)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

World General Equilibrium

Small economy assumption not appropriate to study global savings glut or adjustment of global financial imbalances. Study steady state equilibria in two-country extension of the model. Global interest rate R endogenous N N Nh + N N Nf = 0, (20)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

World General Equilibrium

Small economy assumption not appropriate to study global savings glut or adjustment of global financial imbalances. Study steady state equilibria in two-country extension of the model. Global interest rate R endogenous N N Nh + N N Nf = 0, (20)

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

General Equilibrium

Two countries identical except for size (h=20%, f=80%) and level of social insurance (ςh = 1.5, ςf = 0.75). This implies N N Nh Y Y Y h = −0.5 (21) N N Nf Y Y Y f = 0.125 (22) What is impact of increasing foreign social insurance to the home level?

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

General Equilibrium

Two countries identical except for size (h=20%, f=80%) and level of social insurance (ςh = 1.5, ςf = 0.75). This implies N N Nh Y Y Y h = −0.5 (21) N N Nf Y Y Y f = 0.125 (22) What is impact of increasing foreign social insurance to the home level?

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

General Equilibrium

Two countries identical except for size (h=20%, f=80%) and level of social insurance (ςh = 1.5, ςf = 0.75). This implies N N Nh Y Y Y h = −0.5 (21) N N Nf Y Y Y f = 0.125 (22) What is impact of increasing foreign social insurance to the home level?

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References Growth And Saving Resorbing Global Imbalances

General equilibrium

Wealth ratio, ̣0 Wealth ratio, ̣1 Wealth ratio, ̣2 Capital ratio 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Interest factor, R Wealth and capital ratios

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References

Conclusions

Tractable model of net foreign assets of small open economy Two applications

Relationship between growth and capital flows Long-run implications of reducing global imbalances.

Extensions for future research: portfolio choice, real exchange rates, asset prices, etc.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References

Conclusions

Tractable model of net foreign assets of small open economy Two applications

Relationship between growth and capital flows Long-run implications of reducing global imbalances.

Extensions for future research: portfolio choice, real exchange rates, asset prices, etc.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References

Conclusions

Tractable model of net foreign assets of small open economy Two applications

Relationship between growth and capital flows Long-run implications of reducing global imbalances.

Extensions for future research: portfolio choice, real exchange rates, asset prices, etc.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References

Conclusions

Tractable model of net foreign assets of small open economy Two applications

Relationship between growth and capital flows Long-run implications of reducing global imbalances.

Extensions for future research: portfolio choice, real exchange rates, asset prices, etc.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References

Conclusions

Tractable model of net foreign assets of small open economy Two applications

Relationship between growth and capital flows Long-run implications of reducing global imbalances.

Extensions for future research: portfolio choice, real exchange rates, asset prices, etc.

Carroll, Jeanne A Tractable Model

Introduction Model Calibration And Simulation Applications Conclusions References

References I

Attanasio, Orazio, Lucio Picci, and Antonello Scorcu (2000): “Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries,” Review of Economics and Statistics, 82(1). Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas (2008): “An Equilibrium Model of ”Global Imbalances” and Low Interest Rates,” American Economic Review, 98(1), 358–388. Carroll, Christopher D. (2011): “Theoretical Foundations of Buffer Stock Saving,” Manuscript, Department of Economics, Johns Hopkins University, http://econ.jhu.edu/people/ccarroll/papers/BufferStockTheory. Carroll, Christopher D., and David N. Weil (1994): “Saving and Growth: A Reinterpretation,” Carnegie-Rochester Conference Series on Public Policy, 40, 133–192, http://econ.jhu.edu/people/ccarroll/CarrollWeilSavingAndGrowth.pdf. Fogli, Alessandra, and Fabrizio Perri (2006): “The ‘Great Moderation’ and the U.S. External Imbalance,” NBER Working Paper Number w12708. Loayza, Norman, Klaus Schmidt-Hebbel, and Luis Serv´ en (2000): “What Drives Saving Across the World?,” Review of Economics and Statistics, 82(1). Mendoza, Enrique G., Vincenzo Quadrini, and Jose-Victor Rios-Rull (2007): “Financial Integration, Financial Deepness and Global Imbalances,” NBER Working Paper Number w12909. Sandri, Damiano (2008): “Growth and Capital Flows with Risky Entrepreneurship,” Manuscript, Johns Hopkins University. Toche, Patrick (2005): “A Tractable Model of Precautionary Saving in Continuous Time,” Economics Letters, 87(2), 267–272, http://ideas.repec.org/a/eee/ecolet/v87y2005i2p267-272.html. Carroll, Jeanne A Tractable Model