EconPapers    
Economics at your fingertips  
 

Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate

Woo Jin Choi () and Alan Taylor ()

No 23341, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document a new international stylized fact describing the relationship between real exchange rates and external asset holdings. Economists have long argued that the real exchange rate is associated with the net international investment position, appreciating as external wealth increases. This mechanism has been seen as central for international payments equilibrium and relative price adjustments. However, we argue that the effect of external assets held by the public sector—reserve accumulation—on real exchange rates may be quite different from that of privately held external assets, and that capital controls are a critical factor behind this difference. For 1975–2007, controlling for GDP per capita and the terms of trade, we find that a one percentage point increase in external assets relative to GDP (net of reserves) is related to an 0.24 percent real exchange rate appreciation. On the contrary, a one percentage point increase in reserve accumulation relative to GDP has virtually no effect on the real exchange rate in financially open countries (low capital controls), and is related to a 1.65 percent real exchange rate depreciation in financially closed countries (high capital controls). Results are stronger in developing countries and in more recent periods. Gross rather than net positions matter and we present a new theoretical model to account for the stylized fact. The framework encompasses so-called precautionary and mercantilist motives for reserve accumulation, and also explains how the optimal capital account policy—the mix of reserve accumulation and capital controls—is determined. Further empirical support arises from evidence that reserve accumulation is associated with a trade surplus, along with higher GDP and TFP growth in countries with high capital controls, findings that are consistent with the mechanisms of our model.

JEL-codes: F31 F38 F41 F43 O24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-opm
Date: 2017-04
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
http://www.nber.org/papers/w23341.pdf (application/pdf)

Related works:
Working Paper: Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:23341

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w23341

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-03-31
Handle: RePEc:nbr:nberwo:23341