Safe Asset Demand, Global Capital Flows and Wealth Concentration

IMF Working Papers, October 22, 2021

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Develops a general equilibrium model to analyze and quantify how the US role supplying global reserve assets and funding foreign risky investment contributes to rising wealth concentration among American households.
Frames the US as the “banker to the world” due to its unique role in supplying global reserve assets and funding foreign risky investment.

Financial globalization raises wealth inequality in a financially-developed economy initially due to foreign capital pressing up domestic asset prices.
Much of this increase is transitory and can be reversed as future expected returns on domestic assets fall.
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.
Indicates a possible reversal in the future.

Subjects: 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

Source: IMF Working Paper "Safe Asset Demand, Global Capital Flows and Wealth Concentration" by Taehoon Kim, October 22, 2021.