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International Reserves and Underdeveloped Capital Markets

  • Kathryn M.E. Dominguez

    (University of Michigan & NBER)

International reserve accumulation by developing countries is just one example of the puzzling behavior of international capital flows. Capital should flow to where its return is highest, which ought to be where capital is scare. Yet recent data suggest the opposite Ð net capital flows from developing countries to industrialized countries. This paper examines the role of financial market development in the accumulation of international reserves. In countries with underdeveloped capital markets the governmentÕs accumulation of reserves may substitute for what would otherwise be private sector capital outflows. Effectively, these governments are acting as financial intermediaries, channeling domestic savings away from local uses and into international capital markets, thereby offsetting the effects of domestic financial constraints that lead to excessive private sector exposure to potential capital shortfalls.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r600.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 600.

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Length: 42 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:mie:wpaper:600
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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  1. Reinhart, Carmen M. & Reinhart, Vincent R., 2011. "Entrada de capitales y acumulación de reservas: evidencia reciente," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 20, pages 15-25.
  2. Yin-Wong Cheung & Hiro Ito, 2009. "A Cross-Country Empirical Analysis of International Reserves," International Economic Journal, Taylor & Francis Journals, vol. 23(4), pages 447-481.
  3. Ricardo Caballero & Stavros Panageas, 2005. "Contingent Reserves Management: An Applied Framework," Working Papers Central Bank of Chile 329, Central Bank of Chile.
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  7. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
  8. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  9. Anusha Chari & Wenjie Chen & Kathryn M E Dominguez, 2012. "Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States," IMF Economic Review, Palgrave Macmillan, vol. 60(1), pages 1-42, April.
  10. Laura Alfaro & Fabio Kanczuk, 2007. "Optimal reserve management and sovereign debt," Working Paper Series 2007-29, Federal Reserve Bank of San Francisco.
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