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A Macroprudential Theory of Foreign Reserve Accumulation

Author

Listed:
  • Bengui, Julien
  • Arce, Fernando
  • Bianchi, Javier
Abstract
This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.

Suggested Citation

  • Bengui, Julien & Arce, Fernando & Bianchi, Javier, 2019. "A Macroprudential Theory of Foreign Reserve Accumulation," CEPR Discussion Papers 13952, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13952
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    References listed on IDEAS

    as
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    2. Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2013. "Capital Controls with International Reserve Accumulation: Can This Be Optimal?," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 229-262, July.
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    4. Guillermo Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2013. "Optimal Holdings of International Reserves: Self-insurance against Sudden Stops," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(1), pages 1-35, January-j.
    5. Clark, Peter B, 1970. "Optimum International Reserves and the Speed of Adjustment," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 356-376, March-Apr.
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    7. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
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    23. Caballero, Ricardo J. & Panageas, Stavros, 2008. "Hedging sudden stops and precautionary contractions," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 28-57, February.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Macroprudential policy; International reserves; Financial crises;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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