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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. Carmen M. Reinhart & Vincent R. Reinhart, 2008. "Capital Inflows and Reserve Accumulation: The Recent Evidence," NBER Working Papers 13842, National Bureau of Economic Research, Inc.
  2. Yin-Wong Cheung & Hiro Ito, 2009. "A Cross-Country Empirical Analysis of International Reserves," CESifo Working Paper Series 2654, CESifo Group Munich.
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  4. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," NBER Working Papers 13123, National Bureau of Economic Research, Inc.
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  7. Anusha Chari & Wenjie Chen & Kathryn M.E. Dominguez, 2009. "Foreign Ownership and Firm Performance: Emerging-Market Acquisitions in the United States," NBER Working Papers 14786, National Bureau of Economic Research, Inc.
  8. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
  9. Philippe Martin & Hélène Rey, 2005. "Globalization and Emerging Markets: With or Without Crash?," NBER Working Papers 11550, National Bureau of Economic Research, Inc.
  10. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, 04.
  11. Ricardo Caballero & Stavros Panageas, 2005. "Contingent Reserves Management: An Applied Framework," Working Papers Central Bank of Chile 329, Central Bank of Chile.
  12. Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.
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