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Reserve accumulation, inflation, and moral hazard: Evidence from a natural experiment

Livia Chițu

International Finance, 2021, vol. 24, issue 2, 219-235

Abstract: This study tests whether international reserve accumulation is inflationary because of moral hazard and incentive effects. We use the 2009 allocation of Special Drawing Rights (SDR) as a natural experiment to trace the effect of an exogenous nonmonetary shock on International Monetary Fund members' reserve holdings. In countries that received large SDR allocations, inflation was about half a percentage point higher in the 2 years following the allocation, controlling for other standard determinants. This effect is commensurate with the size of these countries' discretionary fiscal deficits. This result is consistent with the hypothesis that reserve accumulation may be inflationary because of incentive effects.

Date: 2021
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Handle: RePEc:bla:intfin:v:24:y:2021:i:2:p:219-235