Accumulation of large foreign reserves in China: a behavioural perspective

Zhichao Zhang (), Frankie Chau and Li Xie

Economic Change and Restructuring, 2013, vol. 46, issue 1, 85-108

Abstract: The massive accumulation of foreign reserves by China has challenged the conventional thinking about prudent reserve management. This paper develops a behavioural model of optimal decision making under uncertainty to explain the observed Chinese reserve policy. Departing from the conventional approach to utility maximisation based on the agent’s rationality, this paper explicitly models the behaviour of Chinese central banker who is influenced by loss aversion and narrow framing. Embedding the cognitive biases into the precautionary savings approach to holding reserves, the paper shows the behavioural optimality of Chinese reserve build-up and provides a plausible explanation of the dynamics of reserve accumulation in China, hence help make sense of the puzzling Chinese reserve policy. Copyright Springer Science+Business Media New York 2013

Keywords: Reserve accumulation; Precautionary savings; Behavioural finance; Loss aversion; Narrow framing; C61; F31; F43; G02 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10644-012-9136-1

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