A Macroprudential Theory of Foreign Reserve Accumulation

31 Pages Posted: 9 Sep 2019

See all articles by Fernando Arce

Fernando Arce

University of Minnesota - Minneapolis

Julien Bengui

Government of Canada - Bank of Canada

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019

Abstract

This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.

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Suggested Citation

Arce, Fernando and Bengui, Julien and Bianchi, Javier, A Macroprudential Theory of Foreign Reserve Accumulation (September 2019). NBER Working Paper No. w26236, Available at SSRN: https://ssrn.com/abstract=3450262

Fernando Arce (Contact Author)

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Julien Bengui

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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