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Accumulation of large foreign reserves in China: a behavioural perspective

  • Zhichao Zhang
  • Frankie Chau
  • Li Xie

    ()

The massive accumulation of foreign reserves by China has challenged the conventional thinking about prudent reserve management. This paper develops a behavioural model of optimal decision making under uncertainty to explain the observed Chinese reserve policy. Departing from the conventional approach to utility maximisation based on the agent’s rationality, this paper explicitly models the behaviour of Chinese central banker who is influenced by loss aversion and narrow framing. Embedding the cognitive biases into the precautionary savings approach to holding reserves, the paper shows the behavioural optimality of Chinese reserve build-up and provides a plausible explanation of the dynamics of reserve accumulation in China, hence help make sense of the puzzling Chinese reserve policy. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s10644-012-9136-1
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Article provided by Springer in its journal Economic Change and Restructuring.

Volume (Year): 46 (2013)
Issue (Month): 1 (March)
Pages: 85-108

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Handle: RePEc:kap:ecopln:v:46:y:2013:i:1:p:85-108
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=113294

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