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A Macroprudential Theory of Foreign Reserve Accumulation

Fernando Arce, Julien Bengui and Javier Bianchi ()

Staff Working Papers from Bank of Canada

Abstract: This paper proposes a theory of foreign reserves as macroprudential policy. We study an open-economy model of financial crises in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross-section, and can quantitatively account for the recent upward trend in international reserves.

Keywords: Balance of payments and components; Financial stability; Financial system regulation and policies; Foreign reserves management; International financial markets (search for similar items in EconPapers)
JEL-codes: D52 D62 F34 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2019-10
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation (2019) Downloads
Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation (2019)
Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-43

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