Financial Stability, the Trilemma, and International Reserves

Maurice Obstfeld, Jay Shambaugh and Alan Taylor

American Economic Journal: Macroeconomics, 2010, vol. 2, issue 2, 57-94

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. (JEL E23, E43, E44, F31, F32, F34)

JEL-codes: E23 E43 E44 F31 F32 F34 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mac.2.2.57
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Citations: View citations in EconPapers (253)

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Working Paper: Financial Stability, the Trilemma, and International Reserves (2008)
Working Paper: Financial Stability, the Trilemma, and International Reserves (2008)
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