Crowding Out Redefined: The Role of Reserve Accumulation

Carmen Reinhart and Takeshi Tashiro

No 19652, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is well understood that investment serves as a shock absorber at the time of crisis. The duration of the drag on investment, however, is perplexing. For the nine Asian economies we focus on in this study, average investment/GDP is about 6 percentage points lower during 1998-2012 than its average level in the decade before the crisis; if China and India are excluded, the estimated decline exceeds 9 percent. We document how in the wake of crisis home bias in finance usually increases markedly as public and private sectors look inward when external financing becomes prohibitively costly, altogether impossible, or just plain undesirable from a financial stability perspective. Also, previous studies have not made a connection between the sustained reserve accumulation and the persistent and significantly lower levels of investment in the region. Put differently, reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out, driven importantly by increased "liability" home bias in finance and by official capital outflows. We present evidence from Asia to support this interpretation.

JEL-codes: E02 E5 F30 F4 G01 G15 H6 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-mac, nep-opm and nep-sea
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Published as Reinhart, Carmen M. & Tashiro, Takeshi, 2013. "Crowding out redefined: the role of reserve accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-43.

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Related works:
Journal Article: Crowding out redefined: the role of reserve accumulation (2013)
Working Paper: Crowding Out Redefined: The Role of Reserve Accumulation (2013)
Working Paper: Asia Chartbook: Crises, Credit and Debt, 1835-2013 (2013)
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