Reserve Accumulation, Growth and Financial Crises

Gianluca Benigno, Luca Fornaro and Martin Wolf

No 1279, Working Papers from Barcelona School of Economics

Abstract: We present a model that reproduces two salient facts characterizing the international monetary system: Fast growing emerging countries i) run current account surpluses, ii) accumulate international reserves and receive net private in flows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly o set the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. The optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention.

Keywords: foreign reserve accumulation; gross capital flows; growth; financial crises; allocation; puzzle; exchange rate undervaluation (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 F43 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-fdg, nep-isf, nep-mon and nep-opm
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Related works:
Journal Article: Reserve accumulation, growth and financial crises (2022)
Working Paper: Reserve accumulation, growth and financial crises (2022)
Working Paper: Reserve Accumulation, Growth and Financial Crises (2012)
Working Paper: Reserve Accumulation, Growth and Financial Crises (2012)
Working Paper: Reserve accumulation, growth and financial crises (2012)
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