International Reserve Accumulation: Balancing Private Inflows with Public Outflows

Bada Han, Dongwook Kim and Youngjin Yun ()
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Dongwook Kim: Bank of Korea

No 2023-1, Inha University IBER Working Paper Series from Inha University, Institute of Business and Economic Research

Abstract: This paper investigates the reasons behind international reserve accumulation in Emerging Market Economies (EMEs). We rationalize the view held among policymakers in EMEs that reserve accumulation is necessary to counteract the negative effects of unwanted capital inflows. First, we empirically show that EMEs do accumulate reserves in response to global push factor-driven capital inflows, particularly in the form of direct investment. In addition, EMEs with restrictions on residents' investment abroad or with less developed financial institutions accumulate higher levels of reserves. Next, we introduce a theoretical model with direct investment inflows to explain the empirical findings. In the face of a capital flow bonanza, it is optimal for EMEs to invest abroad to smooth consumption. However, various frictions hinder residents' overseas investments or make the investments socially inefficient. In such cases, the public sector accumulates international reserves to supplement the insufficient private outflows or replace the inefficient private outflows. Reserve accumulation becomes an essential tool for managing capital inflows in the presence of restrictions on private outflows.

Keywords: international reserves; sudden stops; financial openness (search for similar items in EconPapers)
JEL-codes: E60 E61 F30 F38 G01 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2023-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:inh:wpaper:2023-1

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