48 Pages Posted: 18 Aug 2008
Date Written: August 2008
The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.
Suggested Citation: Suggested Citation
Obstfeld, Maurice and Shambaugh, Jay and Taylor, Alan M., Financial Stability, the Trilemma, and International Reserves (August 2008). NBER Working Paper No. w14217. Available at SSRN: https://ssrn.com/abstract=1230845