My Research

Job Market Paper:

A Growth Perspective on Foreign Reserve Accumulation

Available here, forthcoming in Macroeconomic Dynamics (July 2014)


  • Abstract:

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 so as to invest in capital. The central bank plays the role of 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.

  • Presentations:

Working papers:

For a Few Dollars More: Reserves and Growth in Times of Crises, with Matthieu Bussière, Menzie Chinn and Noëmie Lisack (available here)


  • Abstract

Based on a dataset of 112 emerging economies and developing countries, this paper addresses two key questions regarding the accumulation of international reserves: first, has the accumulation of reserves effectively protected countries during the 2008-09 financial crisis? And second, what explains the pattern of reserve accumulation observed during and after the crisis? More specifically, the paper investigates the relation between international reserves and the existence of capital controls. We find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly if associated with a less open capital account. In the immediate aftermath of the crisis, countries that depleted foreign reserves during the crisis quickly rebuilt their stocks. This rapid rebuilding has, however, been followed by a deceleration in the pace of accumulation. The timing of this deceleration roughly coincides with the point when reserves reached their pre-crisis level and may be related to the fact that short-term debt accumulation has also decelerated in most countries over this period.

 
 
Balance Sheet Effects, Foreign Reserves and Public Policies (available here)
  • Abstract


Using a simple theoretical framework of the ‘third-generation’ crisis models with multiple equilibria, chapter 3 studies how foreign reserves, accumulated before the onset of the crisis, were useful to enhance countries’ resilience to balance sheet effects during the recent economic turbulence. It is argued that both a targeted lending in foreign currency or a fiscal spending financed by foreign reserves help remove the bad equilibrium represented by a largely depreciated domestic currency and a very low level of domestic investment. Nevertheless, these two policy tools differ in the mechanism through which they stabilize the domestic economy and in terms of the amount of foreign reserves needed. A targeted lending is at work by altering investors’ expectation on firms’ net worth, thus exerts an influence on domestic investment and exchange rate. As long as foreign reserves are sufficient to cover the economy’s external debt, the bad equilibrium is removed even without an actual depletion of reserves. On the contrary, a fiscal spending increases the demand for domestic goods and thus virtually appreciates the domestic exchange rate. An appreciated currency increases firms’ net worth and facilitates investment.

 

 

 

 

Work in progress
"The More the Merrier?" A Time-Varying Relationship between Foreign Reserve Accumulation and Sovereign Borrowing Costs in Latin America, with Clement Marsilli
 

Foreign Reserve Accumulation: Why is This Issue Important? A Literature Survey

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