Accumulation of Foreign Exchange Reserves and Long Term Growth

Victor Polterovich and Vladimir Popov
Authors registered in the RePEc Author Service: Виктор Меерович Полтерович

MPRA Paper from University Library of Munich, Germany

Abstract: Cross-country regressions, reported in this paper for 1960-99 period, seem to suggest that the accumulation of foreign exchange reserves (FER) contributes to economic growth of a developing economy by increasing both the investment/GDP ratio and capital productivity. We offer the following interpretation of these stylized facts: (1) FER accumulation causes real exchange rate (RER) undervaluation that is expansionary in the short run and may have long term effects, if such devaluations are carried out periodically and unexpectedly; (2) RER undervaluation allows to take full advantages of export externality and triggers export-led growth; (3) FER build up attracts foreign direct investment because it increases the credibility of the government of a recipient country and lowers the dollar price of real assets. A three-sector model of endogenous economic growth (including a consumer good sector, investment good sector and an export trade sector) is suggested to demonstrate how undervaluation may improve social welfare. Concepts of FER accumulation trajectories and equilibrium trajectories are introduced. It is demonstrated that small udervaluation of the equilibrium exchange rate may be wealth improving.

Keywords: foreign exchange reserves' accumulation; economic growth (search for similar items in EconPapers)
JEL-codes: O1 (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (82)

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