IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/20069.html
   My bibliography  Save this paper

Accumulation of Foreign Exchange Reserves and Long Term Growth

Author

Abstract

Cross-country regressions, reported in this paper for 1960-99 period, seem to suggest that the accumulation of foreign exchange reserves (FER) contributes to economic growth of a developing economy by increasing both the investment/GDP ratio and capital productivity. We offer the following interpretation of these stylized facts: (1) FER accumulation causes real exchange rate (RER) undervaluation that is expansionary in the short run and may have long term effects, if such devaluations are carried out periodically and unexpectedly; (2) RER undervaluation allows to take full advantages of export externality and triggers export-led growth; (3) FER build up attracts foreign direct investment because it increases the credibility of the government of a recipient country and lowers the dollar price of real assets. A three-sector model of endogenous economic growth (including a consumer good sector, investment good sector and an export trade sector) is suggested to demonstrate how undervaluation may improve social welfare. Concepts of FER accumulation trajectories and equilibrium trajectories are introduced. It is demonstrated that small udervaluation of the equilibrium exchange rate may be wealth improving.

Suggested Citation

  • Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20069
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/20069/1/MPRA_paper_20069.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Beine, Michel & Benassy-Quere, Agnes & Lecourt, Christelle, 2002. "Central bank intervention and foreign exchange rates: new evidence from FIGARCH estimations," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 115-144, February.
    2. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, September.
    4. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 251-270.
    5. Van Wijnbergen, Sweder, 1986. "Exchange rate management and stabilization policies in developing countries," Journal of Development Economics, Elsevier, vol. 23(2), pages 227-247, October.
    6. Buffie, Edward F., 1986. "Devaluation, investment and growth in LDCs," Journal of Development Economics, Elsevier, vol. 20(2), pages 361-379, March.
    7. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    8. Engel, Charles, 2001. "Optimal Exchange Rate Policy: The Influence of Price Setting and Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 518-541, May.
    9. Polterovich, Victor & Popov, Vladimir, 2005. "Appropriate Economic Policies at Different Stages of Development," MPRA Paper 20066, University Library of Munich, Germany.
    10. Morley, Samuel A, 1992. "On the Effect of Devaluation during Stabilization Programs in LDCs," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 21-27, February.
    11. Braun, R. Anton, 1994. "How large is the optimal inflation tax?," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 201-214, October.
    12. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May.
    13. Rodrik, Dani, 1986. "Disequilibrium exchange rates as industrialization policy," Journal of Development Economics, Elsevier, vol. 23(1), pages 89-106, September.
    14. Jens Holscher, 1997. "Economic dynamism in transition economies: Lessons from Germany," Post-Communist Economies, Taylor & Francis Journals, vol. 9(2), pages 173-181.
    15. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    16. Polterovich, Victor, 2007. "Institutional Trap," MPRA Paper 20595, University Library of Munich, Germany.
    17. Pomfret, Richard, 1997. "Growth and Transition: Why Has China's Performance Been So Different?," Journal of Comparative Economics, Elsevier, vol. 25(3), pages 422-440, December.
    18. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, vol. 61(1), pages 85-109, February.
    19. Dollar, David, 1992. "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Economic Development and Cultural Change, University of Chicago Press, vol. 40(3), pages 523-544, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. A. E. Akinlo & A. F. Odusola, 2003. "Assessing the impact of Nigeria's naira depreciation on output and inflation," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 691-703.
    2. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    3. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, vol. 61(1), pages 85-109, February.
    4. EBRAHIMI Sajad & GHADERI Omid & BAYAT Saeed, 2020. "Differences In Exchange Rate Effects On Production Growth: The Case Of Iranian Industries," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 15(3), pages 16-35, December.
    5. Tatiana Evdokimova & Pavel Trunin & Andrei Zubarev, 2013. "The Impact of the Real Ruble Exchange Rate on the Economic Activity in Russia," Research Paper Series, Gaidar Institute for Economic Policy, issue 165P, pages 164-164.
    6. Dynnikova Oksana, 2000. "Real appreciation and output: Russia 1993—1997," EERC Working Paper Series 99-13e, EERC Research Network, Russia and CIS.
    7. M Bahmani-Oskooee & I Miteza, 2006. "Stock Market Growth: An analysis of cointegration and causality," Economic Issues Journal Articles, Economic Issues, vol. 11(1), pages 37-64, March.
    8. Julio López & Ignacio Perrotini, 2006. "Tassi di cambio fluttuanti, deprezzamento valutario e domanda effettiva," Moneta e Credito, Economia civile, vol. 59(235), pages 233-256.
    9. Magda Kandil, 2006. "On the transmission of exchange rate fluctuations to the macroeconomy: Contrasting evidence for developing and developed countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(1), pages 101-127.
    10. Eddy Bekkers & Joseph Francois, 2014. "Bilateral Exchange Rates and Jobs," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 275-298, May.
    11. Steven B. Kamin & Marc Klau, 1997. "Some multi-country evidence on the effects of real exchange rates on output," BIS Working Papers 48, Bank for International Settlements.
    12. Hoffmann, Mathias & Tillmann, Peter, 2012. "International financial integration and national price levels: The role of the exchange rate regime," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1503-1528.
    13. Lanteri, Luis N., 2001. "Choques externos y reasignación sectorial de recursos. Evidencia para la economía argentina," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(271), pages 369-403, julio-sep.
    14. Arabinda Basistha & Sheida Teimouri, 2015. "Currency Crises and Output Dynamics," Open Economies Review, Springer, vol. 26(1), pages 139-153, February.
    15. Shi, Jianhuai, 2007. "Are Currency Appreciations Contractionary in China?," 2007: China's Agricultural Trade: Issues and Prospects Symposium, July 2007, Beijing, China 55020, International Agricultural Trade Research Consortium.
    16. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    17. Pablo Mejia-Reyes & Denise Osborn & Marianne Sensier, 2010. "Modelling real exchange rate effects on output performance in Latin America," Applied Economics, Taylor & Francis Journals, vol. 42(19), pages 2491-2503.
    18. Kim, Yoonbai & Ying, Yung-Hsiang, 2007. "An empirical assessment of currency devaluation in East Asian countries," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 265-283, March.
    19. Jesus Felipe & J. S. L. McCombie & Kaukab Naqvi, 2010. "Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth," Oxford Development Studies, Taylor & Francis Journals, vol. 38(4), pages 477-496.
    20. Anubha Dhasmana, 2015. "Transmission of real exchange rate changes to the manufacturing sector: The role of financial access," International Economics, CEPII research center, issue 143, pages 48-69.

    More about this item

    Keywords

    foreign exchange reserves' accumulation; economic growth;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:20069. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.