Macro-Financial Implications of the Surging Global Demand (and Supply) of International Reserves

Vincenzo Quadrini and Enrique Mendoza
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Vincenzo Quadrini: Univ. of Southern California, CEPRand NBER
Enrique Mendoza: University of Pennsylvania and NBER

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We show these results with a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies.

Pages: 71 pages
Date: 2024-11-23
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
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