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Financial Stability, the Trilemma, and International Reserves

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Author Info
Obstfeld, Maurice
Shambaugh, Jay C
Taylor, Alan M

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6693.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6693

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Related research
Keywords: banking crises capital flight central banks exchange rate regimes financial development foreign exchange global imbalances Guidotti-Greenspan rule international liquidity intervention lender of last resort net foreign assets sterilization sudden stop

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F31 - International Economics - - International Finance - - - Foreign Exchange
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative
O24 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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