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A Growth Perspective on Foreign Reserve Accumulation

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  • Cheng, Gong

Abstract

Based on a dynamic open-economy macroeconomic model, this paper aims at understanding the contribution of domestic financial under-development to foreign reserve accumulation in some emerging market economies, especially in China. It is argued that foreign reserve accumulation is a consequence of a growth strategy induced by strong capital investment in a financially constrained economy. It is further proved using a Ramsey problem that purchasing international reserves is a welfare-improving policy in terms of production efficiency gains when the domestic economy faces two sources of frictions: credit constraint and capital controls. In fact, when domestic firms are occasionally credit-constrained and they do not have a direct access to international financial market, they need domestic saving instruments to increase their retained earnings so that they can sufficiently invest in capital. The central bank/government plays the role of financial intermediary and provides domestic firms with a liquid public bond, thus relaxing the domestic credit constraint. The proceeds of domestic public bonds are then invested abroad due to the limited scope of domestic financial market and a depressed domestic interest rate, leading to foreign reserve stockpiling. The speed of foreign reserve accumulation will slow down with the domestic financial deepening and the development of the domestic financial market.

Suggested Citation

  • Cheng, Gong, 2011. "A Growth Perspective on Foreign Reserve Accumulation," MPRA Paper 46668, University Library of Munich, Germany, revised 01 Mar 2013.
  • Handle: RePEc:pra:mprapa:46668
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    Cited by:

    1. Ionuţ JIANU & Laura-Mădălina PÎRȘCOVEANU & Maria-Daniela TUDORACHE, 2017. "The impact of financial risks on economic growth in EU-15," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 23-44, Spring.
    2. repec:bla:buecrs:v:68:y:2016:i:s1:p:146-170 is not listed on IDEAS
    3. Cheng, Gong, 2015. "Balance sheet effects, foreign reserves and public policies," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 146-165.
    4. Jung, Kuk Mo & Pyun, Ju Hyun, 2016. "International reserves for emerging economies: A liquidity approach," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 230-257.
    5. Andrea Fracasso, 2015. "Economic Rebalancing and Growth: the Japanese experience and China’s prospects," DEM Discussion Papers 2015/07, Department of Economics and Management.
    6. Bussière, Matthieu & Cheng, Gong & Chinn, Menzie D. & Lisack, Noëmie, 2015. "For a few dollars more: Reserves and growth in times of crises," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 127-145.
    7. Gopalakrishnan, Balagopal & Mohapatra, Sanket, 2017. "Turning Over a Golden Leaf? Global Liquidity and Emerging Market Central Banks’ Demand for Gold after the Financial Crisis," IIMA Working Papers WP 2017-04-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    8. Cheng, Gong, 2015. "A Growth Perspective On Foreign Reserve Accumulation," Macroeconomic Dynamics, Cambridge University Press, vol. 19(06), pages 1358-1379, September.
    9. Ionuţ JIANU & Laura-Mădălina PÎRȘCOVEANU & Maria-Daniela TUDORACHE, 2017. "The impact of financial risks on economic growth in EU-15," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 23-44, Spring.

    More about this item

    Keywords

    Foreign reserves; capital controls; credit constraints; domestic savings; capital investment; economic growth; Chinese economy;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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