Why there is a lower bound on the central bank's foreign reserves
This article examines the implications for the balance of payments of imposing a cash-in-advance constraint on financal market transactions. I show that with a welfare-maximizing government this constraint introduces a lower bound on the central bank's net foreign reserves; the depletion of the net foreign reserves below zero results in a welfare loss. I further show that either the private or public sector solvency constraint is violated, if the growth rate ofdomestic credit expansion exceeds a critical magnitude, which is somewhat below the foreign interest rate. Unlike in Buiter (198?), the violation of the solvency constraint does not depend on the way the credit expansion is used. The timing and the size of the speculative attack associated with an anticipated exchange rate regime shift are, however, dependent on the way the credit expansion is injected into the economy.
Volume (Year): 4 (1991)
Issue (Month): 2 (Autumn)
|Contact details of provider:|| Web page: http://www.taloustieteellinenyhdistys.fi|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
- Vittorio Grilli & Nouriel Roubini, 1990.
"Financial Integration, Liquidity and Exchange Rates,"
Cowles Foundation Discussion Papers
939, Cowles Foundation for Research in Economics, Yale University.
- Vittorio Grilli & Nouriel Roubini, 1989. "Financial Integration, Liquidity and Exchange Rates," NBER Working Papers 3088, National Bureau of Economic Research, Inc.
- Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
- Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 1-38, February.
- Willman, Alpo, 1988. "The collapse of the fixed exchange rate regime with sticky wages and imperfect substitutability between domestic and foreign bonds," European Economic Review, Elsevier, vol. 32(9), pages 1817-1838, November.
- Spaventa, Luigi, 1989. "Seigniorage: Old and new policy issues Introduction," European Economic Review, Elsevier, vol. 33(2-3), pages 557-563, March.
- Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
- Claessens, Stijn, 1988. "Balance-of-payments crises in a perfect foresight optimizing model," Journal of International Money and Finance, Elsevier, vol. 7(4), pages 363-372.
- Willman, Alpo, 1987. "Speculative attacks on the currency with uncertain monetary policy reactions," Economics Letters, Elsevier, vol. 25(1), pages 75-78.
- Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
- Robert J. Barro & David B. Gordon, 1983.
"Rules, Discretion and Reputation in a Model of Monetary Policy,"
NBER Working Papers
1079, National Bureau of Economic Research, Inc.
- Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
- Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
When requesting a correction, please mention this item's handle: RePEc:fep:journl:v:4:y:1991:i:2:p:113-129. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Editorial Secretary)
If references are entirely missing, you can add them using this form.