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Creator: Arce, Fernando, Bengui, Julien, and Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 761 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 over-borrowing, 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.
Palabra clave: Macroprudential policy, Financial crises, and International reserves Tema: E00 - Macroeconomics and Monetary Economics: General, F00 - International Economics: General, and G00 - Financial Economics: General