International cooperation in foreign reserve policies in the presence of competitive hoarding

Dongwon Lee

Review of International Economics, 2023, vol. 31, issue 2, 389-412

Abstract: This article analyzes the international reserve accumulation behavior of emerging and developing economies facing “keeping‐up‐with‐the‐Joneses” externalities. I first document empirical evidence for a significant Joneses effect, which has been particularly persistent in Asia and Latin America since the late 1990s. This peer‐pressure motive could encourage excess reserve hoarding, providing a rationale for cooperation. I then develop a theoretical model of the borrowing economy featuring the Joneses effect and the interdependence between reserves and domestic capital investment. Numerical results show that international cooperation can effectively internalize negative externalities associated with competitive reserve hoarding and induce welfare‐enhancing resource allocations.

Date: 2023
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https://doi.org/10.1111/roie.12630

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