Precaution versus mercantilism: Reserve accumulation, capital controls, and the real exchange rate

Woo Jin Choi and Alan Taylor

Journal of International Economics, 2022, vol. 139, issue C

Abstract: We document a new international stylized fact on the relationship between external wealth, capital controls, and the real exchange rate. We first re-confirm that the real exchange rate appreciates when external asset holdings increase, all else equal, a central mechanism in international economics. However, we find that increases in publicly held external assets (reserves) are associated with depreciation, especially if combined with high capital controls. Reserve accumulation is also associated with a larger trade surplus, and higher GDP and TFP growth, in countries with high capital controls. The results hold using an instrumental variable for reserves based on commodity export surrender requirements. A simple rationale is presented to account for the new fact: combined reserves and capital controls can affect trade balances via undervaluation (mercantilist motive), while reserve increases without controls can insure against crises (precautionary motive) independently of real exchange rates.

Keywords: International reserves; Capital controls; Real exchange rates; Trade; Economic growth (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate (2018)
Working Paper: Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate (2017)
Working Paper: Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:139:y:2022:i:c:s0022199622000812

DOI: 10.1016/j.jinteco.2022.103649

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