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Foreign exchange reserve diversification and the “exorbitant privilege”: Global macroeconomic effects

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  • Cova, Pietro
  • Pagano, Patrizio
  • Pisani, Massimiliano

Abstract

We assess the macroeconomic implications for the global economy of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model, calibrated to the euro area, the United States, China and the rest of the world. An increase in the global demand for euros would boost euro area aggregate demand because of the reduction in euro area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US aggregate demand falls because of higher interest rates, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro area increase. We also compute welfare gains/costs for all economies.

Suggested Citation

  • Cova, Pietro & Pagano, Patrizio & Pisani, Massimiliano, 2016. "Foreign exchange reserve diversification and the “exorbitant privilege”: Global macroeconomic effects," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 82-101.
  • Handle: RePEc:eee:jimfin:v:67:y:2016:i:c:p:82-101
    DOI: 10.1016/j.jimonfin.2015.06.012
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Global imbalances; Global currency; Dynamic general equilibrium modeling;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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