Financial Stability, the Trilemma, and International Reserves

Maurice Obstfeld, Jay Shambaugh and Alan Taylor

No 14217, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.

JEL-codes: E44 E58 F21 F31 F36 F41 N10 O24 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Note: IFM
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Citations: View citations in EconPapers (86)

Published as Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.

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Journal Article: Financial Stability, the Trilemma, and International Reserves (2010)
Working Paper: Financial Stability, the Trilemma, and International Reserves (2008)
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