Domestic or global imbalances?: Rising income risk and the fall in the US current account
2014 (English)In: Journal of Monetary Economics, ISSN 0304-3932, E-ISSN 0304-3923, Vol. 64, 47-67 p.Article in journal (Refereed) Published
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, 47-67 p.
Precautionary savings, Global imbalances, Limited commitment, Default, Idiosyncratic income risk
IdentifiersURN: urn:nbn:se:su:diva-105936DOI: 10.1016/j.jmoneco.2014.02.002ISI: 000336474000004OAI: oai:DiVA.org:su-105936DiVA: diva2:733188