Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism

Ceyhun Bora Durdu, Enrique G. Mendoza () and Marco E. Terrones

Journal of Development Economics, 2009, vol. 89, issue 2, pages 194-209

Abstract: Financial globalization had a rocky start in emerging economies hit by Sudden Stops. Foreign reserves have grown very rapidly since then, as if those countries were practicing a New Mercantilism that views foreign reserves as a war chest for defense against Sudden Stops. This paper conducts a quantitative assessment of this argument using a stochastic intertemporal equilibrium framework in which precautionary foreign asset demand is driven by output variability, financial globalization, and Sudden Stop risk. In this framework, credit constraints produce endogenous Sudden Stops. We find that financial globalization and Sudden Stop risk can explain the surge in reserves but output variability cannot. These results hold using the intertemporal preferences of the Bewley-Aiyagari-Hugget precautionary savings model or the Uzawa-Epstein setup with endogenous impatience.

Keywords: Fisherian; deflation; Liability; dollarization; Financial; globalization; Credit; constraints; Precautionary; saving; New; Mercantilism; Sudden; Stops (search for similar items in EconPapers)
Date: 2009

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Related works:
Working Paper: Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism (2007)
Working Paper: Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism (2007)
Working Paper: Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:deveco:v:89:y:2009:i:2:p:194-209

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