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International Reserve Management and the Current Account

In: Current Account and External Financing

Listed author(s):
  • Joshua Aizenman

    (University of California-Santa Cruz)

The paper assesses the costs and benefits of active international reserve management (IRM), shedding light on the question of how intense should IRM be for an emerging market. In principle, an active IRM strategy could lower real exchange rate volatility induced by terms of trade shocks; provide self insurance against sudden stops; reduce the speed of adjustment of the current account; and even allow for higher growth if it fosters exports ("mercantilist" motive). The message of the report is mixed -- management of reserves is not a panacea. The mercantilist case for hoarding international reserves, as an ingredient of an export led growth strategy, is dubious. Done properly, IRM augments macro economic management in turbulent times, mitigating the impact of external adverse shocks and allowing for a smoother current account adjustment. These benefits are especially important for commodity exporting countries, and countries with limited financial development.

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This chapter was published in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Current Account and External Financing, , chapter 11, pages 435-474, 2008.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v12c11pp435-474.
Handle: RePEc:chb:bcchsb:v12c11pp435-474
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  1. Joshua Aizenman & Daniel Riera-Crichton, 2006. "Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration," NBER Working Papers 12363, National Bureau of Economic Research, Inc.
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