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A Macroprudential Theory of Foreign Reserve Accumulation

Author

Listed:
  • Fernando Arce
  • Julien Bengui
  • Javier Bianchi

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 over-borrowing, 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

  • Fernando Arce & Julien Bengui & Javier Bianchi, 2019. "A Macroprudential Theory of Foreign Reserve Accumulation," Working Papers 761, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:761
    DOI: 10.21034/wp.761
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F00 - International Economics - - General - - - General
    • G00 - Financial Economics - - General - - - General

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