Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-22T16:12:10.692Z Has data issue: false hasContentIssue false
  • English
  • Français

A GROWTH PERSPECTIVE ON FOREIGN RESERVE ACCUMULATION

Published online by Cambridge University Press:  10 March 2014

Gong Cheng
Gong Cheng*
Affiliation:
Sciences Po and European Stability Mechanism
*
Address correspondence to: Gong Cheng, Department of Economics, Sciences Po, 28, rue des Saints-Pères, 75007 Paris, France; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

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 in order to invest in capital. The central bank plays the role of a 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.

Keywords

Foreign ReservesCapital ControlsFinancial FrictionsCapital FormationProductivity Growth
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1358 - 1379
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adjemian, Stéphane, Bastani, Houtan, Juillard, Michel, Mihoubi, Ferhat, Perendia, George, Ratto, Marco, and Villemot, Sébastien (2011) Dynare: Reference Manual, version 4. Dynare working paper 1, CEPREMAP.Google Scholar
Ahuja, Ashvin and Nabar, Malhar (2012) Investment-Led Growth in China: Global Spillovers. IMF working paper 12/267.CrossRefGoogle Scholar
Aizenman, Joshua, Chinn, Menzie, and Ito, Hiro (2011) Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma. Journal of the Japanese and International Economies 25 (3), 290–320.CrossRefGoogle Scholar
Aizenman, Joshua and Hutchison, Michael M. (2010) Exchange Market Pressure and Absorption by International Reserves: Emerging Markets and Fear of Reserve Loss during the 2008–09 Crisis. NBER Working paper 16260.CrossRefGoogle Scholar
Aizenman, Joshua and Lee, Jaewoo (2007) International reserves: Precautionary versus mercantilist views, theory and evidence. Open Economies Review 18 (2), 191–214.CrossRefGoogle Scholar
Alfaro, Laura and Kanczuk, Fabio (2009) Optimal reserve management and sovereign debt. Journal of International Economics 77 (1), 23–36.CrossRefGoogle Scholar
Bacchetta, Philippe and Benhima, Kenza (2012) The Demand for Liquid Assets, Corporate Saving, and Global Imbalances. CEPR discussion paper 9268.Google Scholar
Bacchetta, Philippe, Benhima, Kenza, and Kalantzis, Yannick (2013) Capital controls with international reserve accumulation: Can this be optimal? American Economic Journal: Macroeconomics 5 (3), 229–262.Google Scholar
Bai, Chong-En, Hsieh, Chang-Tai, and Qian, Yingyi (2006) The return to capital in China. Brookings Papers on Economic Activity 37 (2), 61–102.CrossRefGoogle Scholar
Bénassy-Quéré, Agnes, Carton, Benjamin, and Gauvin, Ludovic (2011) Rebalancing Growth in China: An International Perspective. Working paper 2011-08, CEPII Research Center.Google Scholar
Benigno, Gianluca and Fornaro, Luca (2012) Reserve Sccumulation, Growth and Financial Crises. CEPR discussion paper 9224.Google Scholar
Bernanke, Ben S., Gertler, Mark, and Gilchrist, Simon (1999) The financial accelerator in a quantitative business cycle framework. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, pp. 1341–1393. Amsterdam: Elsevier.CrossRefGoogle Scholar
Bianchi, Javier, Hatchondo, Juan Carlos, and Martinez, Leonardo (2013) International Reserves and Rollover Risk. IMF working paper 13/33.Google Scholar
Bonatti, Luigi and Fracasso, Andrea (2013) Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy. Journal of International Money and Finance 32 (C), 1044–1078.CrossRefGoogle Scholar
Bond, Steve, Leblebicioglu, Asli, and Schiantarelli, Fabio (2010) Capital accumulation and growth: A new look at the empirical evidence. Journal of Applied Econometrics 25 (7), 1073–1099.CrossRefGoogle Scholar
Bussière, Matthieu, Cheng, Gong, Chinn, Menzie, and Lisack, Noëmie (2014) For a Few Dollars More: Reserves and Growth in Times of Crises. NBER working paper 19791.CrossRefGoogle Scholar
Caballero, Ricardo J., Farhi, Emmanuel, and Gourinchas, Pierre-Olivier (2008) An equilibrium model of “global imbalances'' and low interest rates. American Economic Review 98 (1), 358–393.CrossRefGoogle Scholar
Calvo, Guillermo, Izquierdo, Alejandro, and Loo-Kung, Rudy (2013) Optimal holdings of international reserves: Self-insurance against sudden stops. Monetaria 1 (1), 1–35.Google Scholar
Chamon, Marcos D. and Prasad, Eswar S. (2010) Why are saving rates of urban households in China rising? American Economic Journal: Macroeconomics 2 (1), 93–130.Google Scholar
Cheng, Gong (2013) A Growth Perspective on Foreign Reserve Accumulation. Working paper 443, Banque de France.CrossRefGoogle Scholar
Coeurdacier, Nicolas, Stéphane Guibaud, and Jin, Keyu (2012) Credit Constraints and Growth in a Global Economy. CEPR discussion paper 9109.Google Scholar
Delatte, Anne-Laure and Fouquau, Julien (2012) What drove the massive hoarding of international reserves in emerging economies? A time-varying approach. Review of International Economics 20 (1), 164–176.CrossRefGoogle Scholar
Dominguez, Kathryn M.E. (2010) International reserves and underdeveloped capital markets. In Reichlin, Lucrezia and West, Kenneth D. (eds.), NBER International Seminar on Macroeconomics 2009, pp. 193–221. Chicago: University of Chicago Press.Google Scholar
Dooley, Michael, Folkerts-Landau, David, and Garber, Peter M. (2003) An Essay on the Revived Bretton Woods System. NBER working paper 9971.CrossRefGoogle Scholar
Erosa, Andres and Gervais, Martin (2001) Optimal taxation in infinitely-lived agent and overlapping generations models: A review. Economic Quarterly (Spring), 23–44.Google Scholar
Ghosh, Atish R., Ostry, Jonathan David, and Tsangarides, Charalambos G. (2012) Shifting Motives: Explaining the Buildup in Official Reserves in Emerging Markets since the 1980s. IMF working paper 12/34.Google Scholar
IEO (2012) International Reserves: IMF Concerns and Country perspectives. Evaluation reports of the Independent Evaluation Office, International Monetary Fund.Google Scholar
Jeanne, Olivier (2013) Capital account policies and the real exchange rate. In Giavazzi, Francesco and West, Kenneth D. (eds.), NBER International Seminar on Macroeconomics 2012, pp. 7–42. Chicago: University of Chicago Press.Google Scholar
Jeanne, Olivier and Rancière, Romain (2011) The optimal level of international reserves for emerging market countries: A new formula and some applications. Economic Journal 121 (555), 905–930.CrossRefGoogle Scholar
Korinek, Anton (2011) The new economics of prudential capital controls: A research agenda. IMF Economic Review 59 (3), 523–561.CrossRefGoogle Scholar
Korinek, Anton and Serven, Luis (2010) Undervaluation through Foreign Reserve Accumulation: Static Losses, Dynamic Gains. Policy research working paper 5250, The World Bank.CrossRefGoogle Scholar
Ljungqvist, Lars and Thomas J. Sargent (2007) Understanding European unemployment with a representative family model. Journal of Monetary Economics 54 (8), 2180–2204.CrossRefGoogle Scholar
Merz, Monika (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36 (2), 269–300.CrossRefGoogle Scholar
Nelson, Richard R. and Pack, Howard (1999) The Asian miracle and modern growth theory. Economic Journal 109 (457), 416–436.CrossRefGoogle Scholar
Obstfeld, Maurice, Shambaugh, Jay C., and Taylor, Alan M. (2010) Financial stability, the trilemma, and international reserves. American Economic Journal: Macroeconomics 2 (2), 57–94.Google Scholar
Schmitt-Grohe, Stephanie and Uribe, Martin (2003) Closing small open economy models. Journal of International Economics 61 (1), 163–185.CrossRefGoogle Scholar
Song, Zheng, Storesletten, Kjetil, and Zilibotti, Fabrizio (2011) Growing like China. American Economic Review 101 (1), 196–233.CrossRefGoogle Scholar
Wen, Yi (2011) Making Sense of China's Excessive Foreign Reserves. Working paper series, Federal Reserve Bank of St. Louis.CrossRefGoogle Scholar
Woodford, Michael (1990) Public debt as private liquidity. American Economic Review 80 (2), 382–388.Google Scholar