A Macroprudential Theory of International Reserves

Fernando Arce, Javier Bianchi and Julien Bengui

No 1569, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a theory of international reserves as a macroprudential policy tool. We study a dynamic model that features overborrowing due to a systemic risk externality. We show that the constrained-efficient allocations can be implemented with reserve accumulation. The optimal reserve accumulation is procyclical and leads to more household borrowing, yet the increase in foreign reserves significantly reduces the exposure to a financial crisis. The model is consistent with the observed trends of reserve accumulation and the cross-section.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1569

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