A Macroprudential Theory of Foreign Reserve Accumulation

Fernando Arce, Julien Bengui and Javier Bianchi

No 761, Working Papers from Federal Reserve Bank of Minneapolis

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 over-borrowing, 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: Macroprudential policy; International reserves; Financial crises (search for similar items in EconPapers)
JEL-codes: E00 F00 G00 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-08-26
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Citations: View citations in EconPapers (32)

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Related works:
Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation (2019)
Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation (2019)
Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:761

DOI: 10.21034/wp.761

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