Undervaluation through foreign reserve accumulation : static losses, dynamic gains
AbstractThis paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation"outsources"the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5250.
Date of creation: 01 Mar 2010
Date of revision:
Economic Theory&Research; Debt Markets; Currencies and Exchange Rates; Access to Finance; Emerging Markets;
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Haddad, Mona & Pancaro, Cosimo, 2010.
"Can Real Exchange Rate Undervaluation Boost Exports and Growth in Developing Countries? Yes, But Not for Long,"
World Bank - Economic Premise,
The World Bank, issue 20, pages 1-5, June.
- Mona Haddad & Cosimo Pancaro, 2010. "Can Real Exchange Rate Undervaluation Boost Exports and Growth in Developing Countries? Yes, But Not for Long," World Bank Other Operational Studies 10178, The World Bank.
- Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons," IMF Working Papers 11/298, International Monetary Fund.
- Marc Auboin & Michele Ruta, 2012.
"The Relationship between Exchange Rates and International Trade: A Literature Review,"
CESifo Working Paper Series
3868, CESifo Group Munich.
- Auboin, Marc & Ruta, Michele, 2013. "The relationship between exchange rates and international trade: a literature review," World Trade Review, Cambridge University Press, vol. 12(03), pages 577-605, July.
- Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2011.
"Sovereigns, Upstream Capital Flows and Global Imbalances,"
NBER Working Papers
17396, National Bureau of Economic Research, Inc.
- Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2011. "Sovereigns, Upstream Capital Flows and Global Imbalances," Tinbergen Institute Discussion Papers 11-126/2, Tinbergen Institute.
- Alfaro, Laura & Kalemli-Ozcan, Sebnem & Volosovych, Vadym, 2011. "Sovereigns, Upstream Capital Flows, and Global Imbalances," CEPR Discussion Papers 8648, C.E.P.R. Discussion Papers.
- Diallo, Ibrahima Amadou, 2011. "The effects of real exchange rate misalignment and real exchange volatility on exports," MPRA Paper 32387, University Library of Munich, Germany.
- Marcus Kappler & Helmut Reisen & Moritz Schularick & Edouard Turkisch, 2011.
"The Macroeconomic Effects of Large Exchange Rate Appreciations,"
OECD Development Centre Working Papers
296, OECD Publishing.
- Marcus Kappler & Helmut Reisen & Moritz Schularick & Edouard Turkisch, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," Open Economies Review, Springer, vol. 24(3), pages 471-494, July.
- Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," ZEW Discussion Papers 11-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," Discussion Papers 2011/3, Free University Berlin, School of Business & Economics.
- Javier Bianchi, 2012. "Comment on "Capital Account Policies and the Real Exchange Rate"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 43-48 National Bureau of Economic Research, Inc.
- Eden, Maya & Nguyen, Ha, 2012. "Correcting real exchange rate misalignment : conceptual and practical issues," Policy Research Working Paper Series 6045, The World Bank.
- Philip R. Lane, 2009. "External Imbalances and Macroeconomic Policy in New Zealand," The Institute for International Integration Studies Discussion Paper Series iiisdp376, IIIS.
- Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.
- Daniel Brou & Michele Ruta, 2012.
"A Commitment Theory of Subsidy Agreements,"
CESifo Working Paper Series
3945, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.