NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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A Macroprudential Theory of Foreign Reserve Accumulation

Fernando Arce, Julien Bengui, Javier Bianchi

NBER Working Paper No. 26236
Issued in September 2019
NBER Program(s):Economic Fluctuations and Growth Program, International Finance and Macroeconomics Program, The Monetary Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w26236

 
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