International Reserves and Underdeveloped Capital Markets

Kathryn Dominguez

No 600, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: International reserve accumulation by developing countries is just one example of the puzzling behavior of international capital flows. Capital should flow to where its return is highest, which ought to be where capital is scare. Yet recent data suggest the opposite Ð net capital flows from developing countries to industrialized countries. This paper examines the role of financial market development in the accumulation of international reserves. In countries with underdeveloped capital markets the governmentÕs accumulation of reserves may substitute for what would otherwise be private sector capital outflows. Effectively, these governments are acting as financial intermediaries, channeling domestic savings away from local uses and into international capital markets, thereby offsetting the effects of domestic financial constraints that lead to excessive private sector exposure to potential capital shortfalls.

Keywords: foreign reserves; financial development; external liabilities (search for similar items in EconPapers)
JEL-codes: F21 F32 F33 F34 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2009-08
New Economics Papers: this item is included in nep-fmk and nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (19)

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http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r600.pdf

Related works:
Chapter: International Reserves and Underdeveloped Capital Markets (2010)
Journal Article: International Reserves and Underdeveloped Capital Markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:600

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