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A Macroprudential Theory of Foreign Reserve Accumulation

Fernando Arce, Julien Bengui and Javier Bianchi

No 26236, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E0 F3 F31 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-opm
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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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)
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