Excess Reserves and Macroeconomic Instability
29 Pages Posted: 25 Jul 2010
Date Written: May 15, 2007
This paper is concerned with international reserves. It makes two main points. Firstly, excess reserves cannot be regarded as a substitute for sound fundamentals because the former may destabilize the economic system in the longer term. Secondly, reserve accumulation financed by public debt can lead to a potential debt crisis in developing countries. Optimal control theory is employed to illustrate the stabilization problem in an economy in which excess reserves are financed by fiscal deficit.
Keywords: International Reserves, Fiscal Deficit, Optimal Control Theory, Dynamic Linear Programming.
JEL Classification: D81, E52, F31, F32, F33, F41, F42, F47
Suggested Citation: Suggested Citation