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A Macroprudential Theory of Foreign Reserve Accumulation

Author

Listed:
  • Bengui, Julien
  • Arce, Fernando
  • Bianchi, Javier

Abstract

This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.

Suggested Citation

  • Bengui, Julien & Arce, Fernando & Bianchi, Javier, 2019. "A Macroprudential Theory of Foreign Reserve Accumulation," CEPR Discussion Papers 13952, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13952
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    More about this item

    Keywords

    Macroprudential policy; International reserves; Financial crises;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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