An FTPL Approach to International Reserve Accumulation

Giancarlo Corsetti

No 21113, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Countries around the world hold large stocks of reserves—on average 10% of GDP, with some countries holding as much as 90%. This paper examines the role of international reserve accumulation through the lens of the Fiscal Theory of the Price Level (FTPL). The main insights are as follows. First, for a given level of net debt, issuing reserves against nominal debt modifies the government’s asset base, increasing the stock of liabilities that can be devalued via price-level movements. A high stock of reserves therefore reduces inflation volatility stemming from fiscal shocks. Second, for a given stock of reserves, the greater the equilibrium elasticity of the exchange rate to domestic inflation, the stronger the valuation effects on foreign-currency assets, which help stabilize prices and the exchange rate by affecting net debt. However, these valuation effects are double-edged: a positive stock of international reserves also influences the transmission of foreign nominal (inflation and currency) shocks. In addition to providing a rationale for foreign exchange interventions, nominal-to-real spillovers raise issues in fiscal and monetary policy design.

Keywords: Valuation effects; Debt sustainability; International spillovers; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E31 E62 E63 F31 F34 H63 (search for similar items in EconPapers)
Date: 2026-02
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