Macro-Financial Implications of the Surging Global Demand (and Supply) of International Reserves

Enrique Mendoza and Vincenzo Quadrini

No 32810, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We derive these results from a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies.

JEL-codes: F31 F41 F62 F65 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-ifn, nep-mon and nep-opm
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