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A Macroprudential Theory of Foreign Reserve Accumulation

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

Abstract

We propose a macroprudential theory of foreign reserve accumulation that can rationalize the secular trends in public and private international capital flows. In middle-income countries, the increase in international reserves has been associated with elevated private capital inflows, both in the aggregate and in the cross-section, and economies with a more open capital account have accumulated more reserves. We present an open economy model of financial crises that is consistent with these features. We show that optimal reserve management policy leans against the wind, raising gross private borrowing while improving the net foreign asset position and reducing exposure to crises.

Suggested Citation

  • Arce, Fernando & Bengui, Julien & Bianchi, Javier, 2025. "A Macroprudential Theory of Foreign Reserve Accumulation," IDB Publications (Working Papers) 14336, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:14336
    DOI: http://dx.doi.org/10.18235/0013770
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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