Financial Stability, the Trilemma, and International Reserves

Maurice Obstfeld, Jay C Shambaugh and Alan M. Taylor ()

No 6693, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The rapid growth of international reserves|a development concentrated in the emerging markets|remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial- stability model seems to outperform both traditional models and recent explanations based on external short-term debt.

Keywords: banking crises; capital flight; central banks; exchange rate regimes; financial development; foreign exchange; global imbalances; Guidotti-Greenspan rule; international liquidity; intervention; lender of last resort; net foreign assets; sterilization; sudden stop (search for similar items in EconPapers)
JEL-codes: E44 E58 F21 F31 F36 F41 N10 O24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2008-02
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Working Paper: Financial Stability, the Trilemma, and International Reserves (2008)
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