Sudden stops and reserve accumulation in the presence of international liquidity risk
Flora Lutz and
Journal of International Economics, 2023, vol. 141, issue C
We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to a pecuniary externality, individual agents overborrow and hold too little liquid assets relative to a social planner. This inefficiency rationalizes macroprudential policy intervention in the form of reserve accumulation at the central bank to stabilize trade and the real exchange rate. Our model quantitatively matches the depreciation of the real exchange rate and contractions in output, gross trade flows, and foreign reserve holdings during Sudden Stops.
Keywords: International reserves; Sudden stops; Liquidity; Macroprudential policy; Pecuniary externalities (search for similar items in EconPapers)
JEL-codes: D62 E44 F32 F34 F41 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:141:y:2023:i:c:s0022199623000156
Access Statistics for this article
Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, AndrÃ©s
More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().