A Growth Perspective on Foreign Reserve Accumulation

51 Pages Posted: 16 Jun 2017

See all articles by Gong Cheng

Gong Cheng

European Stability Mechanism

Date Written: 2013


Based on a dynamic open-economy macroeconomic model, this paper analyzes the motive for foreign reserve accumulation in fast-growing emerging economies. The demand for foreign reserves stems from the interaction between productivity growth and underdevelopment of the domestic financial market. As domestic firms are credit-constrained, domestic saving instruments are necessary to increase their retained earnings in order to invest in capital. The central bank plays the role of a financial intermediary and provides liquid public bonds while investing the bond proceeds abroad in the form of foreign reserves. Foreign reserve accumulation is thus part of a catching-up strategy in an economy facing financial frictions. During economic transition, foreign reserve accumulation is proved to be welfare-improving as long as private capital flows are controlled. This joint strategy enables the central bank to channel sufficient external funding to the domestic economy while keeping domestic interest rates under control to cope with positive productivity shocks.

Keywords: Foreign Reserves, Capital Controls, Credit Constraints, Domestic Savings, Capital Investment, Economic Growth, Chinese Economy

JEL Classification: E22, F31, F41, F43

Suggested Citation

Cheng, Gong, A Growth Perspective on Foreign Reserve Accumulation (2013). Macroeconomic Dynamics, Vol. 19, No. 6, 2015; Banque de France Working Paper No. 443. Available at SSRN: https://ssrn.com/abstract=2986981

Gong Cheng (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics