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Too much of a good thing? on the effects of limiting foreign reserve accumulation

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  • Yan, Isabel K.
  • Kumhof, Michael

Abstract

Some emerging economies have recently experienced large government surpluses and accelerating foreign exchange reserve accumulation far in excess of what would be implied by the literature on optimal reserves. China in particular has repeatedly stressed that there may be an upper limit to how many reserves it is willing to hold. Using a dynamic general equilibrium model, we show that the credible expectation of such a limit would lead to a balance of payments anti-crisis, which is characterized by an economic boom, real appreciation, growing demand for domestic currency, and domestic inflation, in the period prior to the limit being reached.

Suggested Citation

  • Yan, Isabel K. & Kumhof, Michael, 2011. "Too much of a good thing? on the effects of limiting foreign reserve accumulation," MPRA Paper 35231, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:35231
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    File URL: https://mpra.ub.uni-muenchen.de/35231/1/MPRA_paper_35231.pdf
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    References listed on IDEAS

    as
    1. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    2. Adams , Charles & Park, Donghyun, 2009. "Causes and Consequences of Global Imbalances: Perspective from Developing Asia," Asian Development Review, Asian Development Bank, vol. 26(1), pages 19-47.
    3. Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.
    4. 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.
    5. Enrique G. Mendoza, 2005. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," NBER Working Papers 11691, National Bureau of Economic Research, Inc.
    6. Kumhof, Michael & Li, Shujing & Yan, Isabel, 2007. "Balance of payments crises under inflation targeting," Journal of International Economics, Elsevier, vol. 72(1), pages 242-264, May.
    7. David Cook & James Yetman, 2012. "Expanding central bank balance sheets in emerging Asia: a compendium of risk and some evidence," BIS Papers chapters,in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 30-75 Bank for International Settlements.
    8. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, August.
    9. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
    10. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
    11. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Balance of payments anti-crises; foreign exchange reserves; foreign exchange intervention; inflation targeting; exchange rate targeting;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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