Foreign exchange reserve diversification and the “exorbitant privilege”: Global macroeconomic effects

Pietro Cova, Patrizio Pagano () and Massimiliano Pisani

Journal of International Money and Finance, 2016, vol. 67, issue C, 82-101

Abstract: We assess the macroeconomic implications for the global economy of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model, calibrated to the euro area, the United States, China and the rest of the world. An increase in the global demand for euros would boost euro area aggregate demand because of the reduction in euro area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US aggregate demand falls because of higher interest rates, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro area increase. We also compute welfare gains/costs for all economies.

Keywords: Global imbalances; Global currency; Dynamic general equilibrium modeling (search for similar items in EconPapers)
JEL-codes: C51 E52 F33 F41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:67:y:2016:i:c:p:82-101

DOI: 10.1016/j.jimonfin.2015.06.012

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