Balance-of-payments anti-crises

Michael Kumhof and Isabel Yan

Journal of Macroeconomics, 2016, vol. 48, issue C, 186-202

Abstract: China and Switzerland have recently experienced foreign exchange reserve accumulation far in excess of what would be implied by the literature on optimal reserves. Using a dynamic general equilibrium model, we show that the credible expectation of an upper limit to how many reserves a country is willing to accumulate would lead to a balance-of-payments anti-crisis. This is characterized by an accelerated pre-crisis accumulation of foreign exchange reserves, followed by a collapse of the monetary target that is instantaneous under exchange rate targeting and gradual under price level targeting. We argue that Switzerland has recently experienced such an event.

Keywords: Foreign exchange reserves; Foreign exchange intervention; Price level targeting; Exchange rate targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 E63 F41 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Balance of Payments Anti-Crises (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:48:y:2016:i:c:p:186-202

DOI: 10.1016/j.jmacro.2016.02.005

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