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A Macroprudential Theory of Foreign Reserve Accumulation

Fernando Arce, Julien Bengui and Javier Bianchi ()

No 13952, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: financial crises; International Reserves; macroprudential policy (search for similar items in EconPapers)
JEL-codes: D52 D62 F24 F38 (search for similar items in EconPapers)
Date: 2019-08
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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