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Financial Stability, the Trilemma, and International Reserves

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  • Maurice Obstfeld
  • Jay C. Shambaugh
  • Alan M. Taylor

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 E23, E43, E44, F31, F32, F34)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 2 (April)
Pages: 57-94

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:2:p:57-94

Note: DOI: 10.1257/mac.2.2.57
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