A Macroeconomic Perspective on Reserve Accumulation

22 Pages Posted: 15 Oct 2009

See all articles by Avner Bar-Ilan

Avner Bar-Ilan

University of Haifa - Department of Economics

Nancy Peregrim Marion

Dartmouth College - Department of Economics

Abstract

This paper nests the buffer stock model within a standard open-economy model to capture two motives for international reserves accumulation—the insurance motive and the export-led growth motive. The model is solved for two exchange-rate policies, discretion and a rule with escape clause. It illustrates the behavior of international reserves and other macroeconomic variables when the policymaker pursues output and inflation stabilization and recognizes the supply of reserves can constrain the choice of exchange rate and the choice of exchange rate affects the supply of reserves. When output is below potential, it is optimal under both discretion and the rule to adopt a weak currency and promote export-led growth to achieve output and inflation stabilization. This policy leads to reserve accumulation and is consistent with the behavior of China. When reserves are low initially, welfare is higher when the policymaker follows a rule.

Suggested Citation

Bar-Ilan, Avner and Marion, Nancy P., A Macroeconomic Perspective on Reserve Accumulation. Review of International Economics, Vol. 17, Issue 4, pp. 802-823, September 2009, Available at SSRN: https://ssrn.com/abstract=1489035 or http://dx.doi.org/10.1111/j.1467-9396.2009.00846.x

Avner Bar-Ilan (Contact Author)

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Nancy P. Marion

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
(603) 646-2511 (Phone)

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