Crowding Out Redefined: The Role of Reserve Accumulation

46 Pages Posted: 16 Nov 2013

See all articles by Carmen Reinhart

Carmen Reinhart

Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Takeshi Tashiro

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2013

Abstract

It is well understood that investment serves as a shock absorber at the time of crisis. The duration of the drag on investment, however, is perplexing. For the nine Asian economies we focus on in this study, average investment/GDP is about 6 percentage points lower during 1998-2012 than its average level in the decade before the crisis; if China and India are excluded, the estimated decline exceeds 9 percent. We document how in the wake of crisis home bias in finance usually increases markedly as public and private sectors look inward when external financing becomes prohibitively costly, altogether impossible, or just plain undesirable from a financial stability perspective. Also, previous studies have not made a connection between the sustained reserve accumulation and the persistent and significantly lower levels of investment in the region. Put differently, reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out, driven importantly by increased "liability" home bias in finance and by official capital outflows. We present evidence from Asia to support this interpretation.

Suggested Citation

Reinhart, Carmen and Tashiro, Takeshi, Crowding Out Redefined: The Role of Reserve Accumulation (November 2013). NBER Working Paper No. w19652, Available at SSRN: https://ssrn.com/abstract=2355658

Carmen Reinhart (Contact Author)

Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ( email )

79 JFK Street
Cambridge, MA 02138
United States
617-496-8643 (Phone)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Takeshi Tashiro

Harvard University ( email )

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