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International Reserve Accumulation: Balancing Private Inflows with Public Outflows

Author

Listed:
  • Bada Han

    (Bank of Korea)

  • Dongwook Kim

    (Bank of Korea)

  • Youngjin Yun

    (Inha University)

Abstract
This paper investigates the reasons behind international reserve accumulation in Emerging Market Economies (EMEs). We rationalize the view held among policymakers in EMEs that reserve accumulation is necessary to counteract the negative effects of unwanted capital inflows. First, we empirically show that EMEs do accumulate reserves in response to global push factor-driven capital inflows, particularly in the form of direct investment. In addition, EMEs with restrictions on residents' investment abroad or with less developed financial institutions accumulate higher levels of reserves. Next, we introduce a theoretical model with direct investment inflows to explain the empirical findings. In the face of a capital flow bonanza, it is optimal for EMEs to invest abroad to smooth consumption. However, various frictions hinder residents' overseas investments or make the investments socially inefficient. In such cases, the public sector accumulates international reserves to supplement the insufficient private outflows or replace the inefficient private outflows. Reserve accumulation becomes an essential tool for managing capital inflows in the presence of restrictions on private outflows.

Suggested Citation

  • Bada Han & Dongwook Kim & Youngjin Yun, 2023. "International Reserve Accumulation: Balancing Private Inflows with Public Outflows," Inha University IBER Working Paper Series 2023-1, Inha University, Institute of Business and Economic Research.
    • Handle: RePEc:inh:wpaper:2023-1
    as

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    File URL: https://drive.google.com/file/d/1SW9XKO21IFA6efZlr9nr2AvFHJ6Od-AY/view
    File Function: First version, 2023
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    More about this item

    Keywords

    international reserves; sudden stops; financial openness;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F30 - International Economics - - International Finance - - - General
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G01 - Financial Economics - - General - - - Financial Crises

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