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Too much of a good thing? on the effects of limiting foreign reserve accumulation

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  • Yan, Isabel K.
  • Kumhof, Michael

Abstract

Some emerging economies have recently experienced large government surpluses and accelerating foreign exchange reserve accumulation far in excess of what would be implied by the literature on optimal reserves. China in particular has repeatedly stressed that there may be an upper limit to how many reserves it is willing to hold. Using a dynamic general equilibrium model, we show that the credible expectation of such a limit would lead to a balance of payments anti-crisis, which is characterized by an economic boom, real appreciation, growing demand for domestic currency, and domestic inflation, in the period prior to the limit being reached.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35231.

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Date of creation: Sep 2011
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Handle: RePEc:pra:mprapa:35231

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Keywords: Balance of payments anti-crises; foreign exchange reserves; foreign exchange intervention; inflation targeting; exchange rate targeting;

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  1. Michael Kumhof & Shujing Li & Isabel Yan, . "Balance of Payments Crises Under Inflation Targeting," Working Papers 00020, Stanford University, Department of Economics.
  2. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
  3. Adams, Charles & Park, Donghyun, 2009. "Causes and Consequences of Global Imbalances: Perspective from Developing Asia," ADB Economics Working Paper Series 157, Asian Development Bank.
  4. Adams , Charles & Park, Donghyun, 2009. "Causes and Consequences of Global Imbalances: Perspective from Developing Asia," Asian Development Review, Asian Development Bank, vol. 26(1), pages 19-47.
  5. Enrique G. Mendoza, 2005. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," NBER Working Papers 11691, National Bureau of Economic Research, Inc.
  6. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  7. Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.
  8. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
  9. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  10. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
  11. David Cook & James Yetman, 2012. "Expanding central bank balance sheets in emerging Asia: a compendium of risk and some evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 30-75 Bank for International Settlements.
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