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Foreign Exchange Reserves in a Credit Constrained Economy

Author

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  • Kurmas Akdogan

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We discuss the role of foreign exchange reserves as precautionary savings under an imperfect market framework due to the presence of endogenously determined borrowing constraints. We show that cost of holding reserves is higher in borrowing constrained economies than unconstrained ones as a result of the leverage effect of the debt. We also argue that high global reserve holdings can even be welfare reducing for the world economy where financially constrained developing countries are heavy borrowers in international lending markets.

Suggested Citation

  • Kurmas Akdogan, 2010. "Foreign Exchange Reserves in a Credit Constrained Economy," Birkbeck Working Papers in Economics and Finance 1014, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:1014
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    File URL: http://www.bbk.ac.uk/ems/research/wp/2010/PDFs/BWPEF1014.pdf
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    References listed on IDEAS

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    Cited by:

    1. Dariusz Urban, 2011. "Macroeconomic Considerations and Motives of Sovereign Wealth Funds Activity," Contemporary Economics, University of Finance and Management in Warsaw, vol. 5(2), June.

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