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Macro-Financial Implications of the Surging Global Demand (and Supply) of International Reserves

Author

Listed:
  • Vincenzo Quadrini

    (Univ. of Southern California, CEPRand NBER)

  • Enrique G. Mendoza

    (University of Pennsylvania and NBER)

Abstract

Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We show these results with a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies.

Suggested Citation

  • Vincenzo Quadrini & Enrique G. Mendoza, 2024. "Macro-Financial Implications of the Surging Global Demand (and Supply) of International Reserves," PIER Working Paper Archive 24-038, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:24-038
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    References listed on IDEAS

    as
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