Optimally Controlled Long-Term Stability: Bond Financed Reserves in a Small Open Economy

Posted: 29 Jun 2010

See all articles by Jeo Lee

Jeo Lee

Isle of Man International Business School

Pasquale Scaramozzino

University of Rome II - Faculty of Economics; University of London - School of Oriental and African Studies (SOAS); University of London - Centre for Financial and Management Studies (CeFIMS)

Date Written: June 28, 2010

Abstract

This paper is concerned with international reserves where the accumulation of reserves is financed by public debt. Optimally controlled paths are used to illustrate the possibility of long term instability in a small macroeconomic system. The results indicate that reserve accumulation financed by public debt can lead to a potential debt crisis because it may destabilize the economic system in the longer term. In the most serious case, weak fundamentals combined with bond financed reserve accumulation may lead to multiple liquidity crises.

Keywords: International Reserves, Optimal Control, Fiscal Policy

JEL Classification: C51, D81, F31, F32, F33, F41, F42, F47, E58

Suggested Citation

Lee, Jeo and Scaramozzino, Pasquale, Optimally Controlled Long-Term Stability: Bond Financed Reserves in a Small Open Economy (June 28, 2010). Available at SSRN: https://ssrn.com/abstract=1632015

Jeo Lee (Contact Author)

Isle of Man International Business School ( email )

The University Centre
Old Castletown Road
Douglas Isle of Man, IM2 1QB
United Kingdom

Pasquale Scaramozzino

University of Rome II - Faculty of Economics ( email )

Via Columbia n.2
Rome, 00100
Italy

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

University of London - Centre for Financial and Management Studies (CeFIMS)

Thornhaugh Street
London, WC1H 0XG
United Kingdom

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