NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Woo Jin Choi

Department of Economics
University of Virginia
Charlottesville VA 22903

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NBER Working Papers and Publications

April 2017Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate
with Alan M. Taylor: w23341
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 ...
 
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