Foreign exchange reserve diversification and the "exorbitant privilege"

Pietro Cova, Patrizio Pagano () and Massimiliano Pisani

No 964, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We assess the global macroeconomic implications of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model of the world economy, calibrated on the euro area, the United States, China, Japan and the rest of the world. An increase in 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 economic activity falls because of higher interest rates, which depress domestic aggregate demand, 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 modelling (search for similar items in EconPapers)
JEL-codes: C51 E52 F33 F41 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_964_14

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