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International Balance of Payments Financing and Adjustment

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Author Info
Willem H. Buiter
Jonathan Eaton

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Abstract

This paper explores some implications of the use of national currencies as international reserves. First, a closed economy overlapping-generations model is developed to derive time-consistent tax and inflation policies for a government that is financing a given stream of expenditures. Second, the effects of allowing a government to hold a foreign currency as a reserve asset and to have its currency held as a reserve asset abroad are considered. The use of national currencies as currencies of denomination for international lending creates an incentive for the governments whose currencies are used to alter their inflation rates to extract resources from the rest of the world. When reserves are constrained to be nonnegative the use of national currencies as international reserves raises the inflation rate in reserve issuing countries but does not effect theiInflation rate in reserve holders. The opposite result arises when loans are denominated in the borrowers' currencies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1120.

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Date of creation: Apr 1984
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Handle: RePEc:nbr:nberwo:1120

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  1. Alessandra Casella, 1990. "Participation in a Currency Union," NBER Working Papers 3220, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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