Foreign Reserve Accumulation, Foreign Direct Investment, and Economic Growth
Review of Economic Dynamics, 2022, vol. 43, 241-262
This paper develops a quantitative small-open-economy model to study the determinants of the optimal pace of foreign reserve accumulation by developing countries. In the model, reserve accumulation depreciates the real exchange rate and attracts foreign direct investment (FDI) inflows, which promotes productivity growth through endogenous firm dynamics. The economy is also subject to sudden stops in the form of an occasionally binding constraint on foreign borrowing, and accumulated reserves are used to prevent severe economic downturns. The model shows that two factors are the key determinants of the optimal pace of reserve accumulation: the elasticity of the foreign borrowing spread with respect to foreign debt and the entry cost for FDI. The model suggests that these two factors can explain a substantial amount of the cross-country variation in the observed pace of reserve accumulation. (Copyright: Elsevier)
Keywords: Endogenous growth; Real exchange rate; Gross capital flows (search for similar items in EconPapers)
JEL-codes: F23 F31 F32 F41 F43 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.
Software Item: Code and data files for "Foreign Reserve Accumulation, Foreign Direct Investment, and Economic Growth" (2021)
Working Paper: Online Appendix to "Foreign Reserve Accumulation, Foreign Direct Investment, and Economic Growth" (2021)
Working Paper: Foreign Reserve Accumulation, Foreign Direct Investment, and Economic Growth (2019)
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:red:issued:19-52
Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/
Access Statistics for this article
Review of Economic Dynamics is currently edited by Loukas Karabarbounis
More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().