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Domestic or global imbalances?: Rising income risk and the fall in the US current account
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2014 (English)In: Journal of Monetary Economics, ISSN 0304-3932, E-ISSN 1873-1295, Vol. 64, p. 47-67Article in journal (Refereed) Published
Abstract [en]

When default leads to exclusion from financial markets, the implied loss of consumption smoothing opportunities is more costly when income volatility is high. A rise in income risk thus makes default less attractive, allowing creditors to relax borrowing limits. I show how, in an open economy, this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk, against the precautionary savings intuition. Conditions for this depend on whether default constrains complete or uncontingent contracts. The post-1980 rise in US household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low.

Place, publisher, year, edition, pages
2014. Vol. 64, p. 47-67
Keyword [en]
Precautionary savings, Global imbalances, Limited commitment, Default, Idiosyncratic income risk
National Category
Economics
Identifiers
URN: urn:nbn:se:su:diva-105936DOI: 10.1016/j.jmoneco.2014.02.002ISI: 000336474000004OAI: oai:DiVA.org:su-105936DiVA, id: diva2:733188
Note

AuthorCount:1;

Available from: 2014-07-08 Created: 2014-07-08 Last updated: 2017-12-05Bibliographically approved

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