Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism: Working Paper 2007-10

C. Bora Durdu, Enrique Mendoza and Marco Terrones

No 18952, Working Papers from Congressional Budget Office

Abstract: Financial globalization in emerging economies has been challenged by a series of Sudden Stops since the mid 1990s. Foreign reserves grew very rapidly during this period; hence, it is often argued that we live in the era of a New Mercantilism in which large stocks of reserves are a war chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a stochastic intertemporal equilibrium framework with incomplete asset markets in which precautionary saving affects foreign assets through three mechanisms: business cycle volatility, financial

Date: 2007-07-01
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