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Financial Stability, the Trilemma, and International Reserves

  • Maurice Obstfeld
  • Jay C. Shambaugh
  • Alan M. Taylor

The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14217.

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Date of creation: Aug 2008
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Publication status: published as Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
Handle: RePEc:nbr:nberwo:14217
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