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A Macroprudential Theory of International Reserves

Author

Listed:
  • Fernando Arce Munoz

    (University of MInnesota)

  • Javier Bianchi

    (Federal Reserve Bank of Minneapolis)

  • Julien Bengui

    (Université de Montréal)

Abstract

This paper develops a theory of international reserves as a macroprudential policy tool. We study a dynamic model that features overborrowing due to a systemic risk externality. We show that the constrained-efficient allocations can be implemented with reserve accumulation. The optimal reserve accumulation is procyclical and leads to more household borrowing, yet the increase in foreign reserves significantly reduces the exposure to a financial crisis. The model is consistent with the observed trends of reserve accumulation and the cross-section.

Suggested Citation

  • Fernando Arce Munoz & Javier Bianchi & Julien Bengui, 2019. "A Macroprudential Theory of International Reserves," 2019 Meeting Papers 1569, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1569
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    Cited by:

    1. Flora Lutz & Leopold Zessner-Spitzenberg, 2019. "Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk," Vienna Economics Papers vie1907, University of Vienna, Department of Economics.
    2. Flora Lutz & Leopold Zessner-Spitzenberg, 2019. "Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk," Vienna Economics Papers 1907, University of Vienna, Department of Economics.
    3. Lutz, Flora & Zessner-Spitzenberg, Leopold, 2020. "Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224520, Verein für Socialpolitik / German Economic Association.

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