Safe Asset Demand, Global Capital Flows and Wealth Concentration

October 22, 2021

Preview Citation

Format: Chicago

Taehoon Kim. Safe Asset Demand, Global Capital Flows and Wealth Concentration, (USA: International Monetary Fund, 2021) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The US economy is often referred to as the “banker to the world,” due to its unique role in supplying global reserve assets and funding foreign risky investment. This paper develops a general equilibrium model to analyze and quantify the contribution of this role to rising wealth concentration among American households. I highlight the following points: 1) financial globalization raises wealth inequality in a financially-developed economy initially due to foreign capital pressing up domestic asset prices; 2) much of this increase is transitory and can be reversed as future expected returns on domestic assets fall; and 3) despite the low-interest-rate environment, newly accessed foreign capital provides incentives for affluent households to reallocate wealth toward risky assets while impoverished households increase their debt. Wealth concentration ensues only if this rebalancing effect is large enough to counteract diminished return on domestic assets. Quantitative analysis suggests that global financial integration alone can account for a third to a half of the observed increase in the current top one percent wealth share in the US, but indicates a possible reversal in the future.

Subject: Balance of payments, Foreign direct investment, Globalization, Income distribution, Income inequality, National accounts, Return on investment

Keywords: Capital flows, Closed economy, Financial integration, Foreign direct investment, Global, Global capital flows, Income distribution, Income inequality, Return on investment, Risky asset, Safe asset, Security market liberalization, Wealth concentration, Wealth inequality, Wealth inequality

Publication Details

Pages:

84
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/254
Stock No:

WPIEA2021254
ISBN:

9781589066939
ISSN:

1018-5941

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