A Macroprudential Theory of Foreign Reserve Accumulation

34 Pages Posted: 7 Oct 2019

See all articles by Fernando Arce

Fernando Arce

University of Minnesota - Minneapolis

Julien Bengui

Université de Montréal

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: August 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.

Keywords: financial crises, International Reserves, macroprudential policy

JEL Classification: D52, D62, F24, F38

Suggested Citation

Arce, Fernando and Bengui, Julien and Bianchi, Javier, A Macroprudential Theory of Foreign Reserve Accumulation (August 2019). CEPR Discussion Paper No. DP13952, Available at SSRN: https://ssrn.com/abstract=3464476

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

Université de Montréal ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Javier Bianchi

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

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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