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A Macroeconomic Perspective on Reserve Accumulation

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  • Avner Bar-Ilan
  • Nancy P. Marion

Abstract

This paper nests the buffer stock model within a standard open-economy model to capture two motives for international reserves accumulation-the insurance motive and the export-led growth motive. The model is solved for two exchange-rate policies, discretion and a rule with escape clause. It illustrates the behavior of international reserves and other macroeconomic variables when the policymaker pursues output and inflation stabilization and recognizes the supply of reserves can constrain the choice of exchange rate and the choice of exchange rate affects the supply of reserves. When output is below potential, it is optimal under both discretion and the rule to adopt a weak currency and promote export-led growth to achieve output and inflation stabilization. This policy leads to reserve accumulation and is consistent with the behavior of China. When reserves are low initially, welfare is higher when the policymaker follows a rule. Copyright © 2009 Blackwell Publishing Ltd.

Suggested Citation

  • Avner Bar-Ilan & Nancy P. Marion, 2009. "A Macroeconomic Perspective on Reserve Accumulation," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 802-823, September.
  • Handle: RePEc:bla:reviec:v:17:y:2009:i:4:p:802-823
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    References listed on IDEAS

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    1. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, July.
    2. Bar-Ilan, Avner & Marion, Nancy P. & Perry, David, 2007. "Drift control of international reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3110-3137, September.
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    Cited by:

    1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    2. Anne‐Laure Delatte & Julien Fouquau, 2012. "What Drove the Massive Hoarding of International Reserves in Emerging Economies? A Time‐varying Approach," Review of International Economics, Wiley Blackwell, vol. 20(1), pages 164-176, February.
    3. Marcello Spanò, 2013. "Foreign Reserves as Hedging Instruments in Emerging Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(2), pages 203-230, April.
    4. Marcello Spanò, 2012. "The Effect Of Openness On Foreign Reserves And Growth In The Emerging Economies," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 7-23, March.
    5. Prakash Shrestha, 2017. "Macroeconomic Impact of International Reserves: Empirical Evidence from South Asia," Working Papers id:12166, eSocialSciences.
    6. Florian Brugger, 2016. "Asias Reserve Accumulation: Part of a New Paradigm," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(8), pages 457-476, August.
    7. GBANDI, Tchapo, 2016. "Ratios d’adéquation et fonction de demande des réserves de change dans les pays de l’UEMOA
      [Title: Foreign reserve adequacy ratios and reserve demand function in WAEMU countries]
      ," MPRA Paper 82145, University Library of Munich, Germany, revised 25 Jun 2016.
    8. Florian Brugger, 2015. "Asia’s Reserve Accumulation: Part of a New Paradigm," Working Paper Series, Social and Economic Sciences 2015-03, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    9. Anne-Laure Delatte & Julien Fouquau, 2012. "What drove the massive hoarding of international reserves? A time-varying approach," Post-Print hal-00822294, HAL.
    10. Prakash Kumar Shrestha, Ph.D., 2016. "Macroeconomic Impact of International Reserves: Empirical Evidence from South Asia," NRB Working Paper 32/2016, Nepal Rastra Bank, Research Department.

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