Working Papers

Reserve Accumulation Revisited. A Conditional Political Business Cycle Approach

International capital inflow surges are notoriously destabilizing. Foreign capital is fickle, and benefits accrued from large inflows can quickly evaporate if investors decide to shift capital en masse. Infamous examples of this type of reversal include the Tequila Crisis, Asian Financial Crisis, Russian Crisis and more recently the Global Financial Crisis. In the wake of these crises, policymakers have naturally asked themselves if there are any safeguards countries can adopt to resist these forces.

For many analysts, a large war chest of international reserves is seen as a prudent means of self-insurance against the vicissitudes of finance. Consequently, researchers have tried to answer the question of what economic and political factors contribute to reserve accumulation. Existing studies have argued for a monetary political business cycle of reserves, suggesting reserve accumulation is costly, and countries will lower their reserve holdings in the run-up to elections in order to allocate these funds towards other uses.

Building on this earlier work, I argue that the dynamics of the political business cycle of reserve accumulation fundamentally change depending on whether a country is experiencing large inflows of foreign capital. During foreign inflow surges, failure to accumulate adequate reserves can generate a real appreciation of the exchange rate, destabilizing the exchange rate and eroding the competitiveness of export sectors. I argue that non-Left governments more aligned with internationally oriented interests are particularly responsive to this destabilization. Thus, the expected political business cycle effect on reserve holdings is positive for these types of governments during surges.

Examining quarterly data, I find government partisanship and prevailing foreign capital availability interact to modify previously documented political business cycle relationships between reserve growth and election timing. I find the expected negative political business cycle relationship only holds for non-Left governments that are not experiencing large capital inflows. In contrast, during periods of capital surges, non-Left governments are associated with greater reserve accumulation around elections.

Multinationals as Global Financiers - With Taehoon Kim (IMF) [link]

US multinational companies (MNCs) play a prominent role in raising capital abroad and investing in high-yield global business opportunities. Using administrative data collected by the US Bureau of Economic Analysis on both the intensive and extensive margins of the activities of US MNCs and their foreign affiliates, we estimate the impact of MNC operations on the persistent spread between the return on assets (ROA) and the interest rate payments of firms. Our evidence indicates MNCs enjoy a 0.9% larger spread between ROA and average interest rate compared to when these same firms did not have large ownership holdings in foreign affiliates. We also introduce a model of MNC activity to disentangle potential mechanisms to explain the spread and estimate the implied ’FDI Restrictiveness’ of different regions based on observed patterns of foreign investment. Our simulations suggest some of the variations can be accounted for by the incomplete integration of global financial markets. Our results highlight the role of US multinationals as global arbitrageurs in addition to being global risk-takers.