American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Optimal Foreign Reserves and Central Bank Policy under Financial Stress
American Economic Journal: Macroeconomics
vol. 16,
no. 3, July 2024
(pp. 230–67)
Abstract
We study foreign reserves accumulation and liquidity policy in an open economy under financial stress. Firms and households finance investment and consumption by borrowing from banks, which borrow from abroad. Binding financial constraints cause the domestic interest rate to rise over the world rate and the exchange rate to depreciate, implying inefficiently low investment and consumption. A role emerges for a central bank that accumulates reserves to provide international liquidity when financial frictions bind. Our analysis yields novel insights on the determinants of optimal reserves accumulation cum liquidity provision and their role vis-à-vis capital flow management policies.Citation
Céspedes, Luis Felipe, and Roberto Chang. 2024. "Optimal Foreign Reserves and Central Bank Policy under Financial Stress." American Economic Journal: Macroeconomics, 16 (3): 230–67. DOI: 10.1257/mac.20210117Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- E22 Investment; Capital; Intangible Capital; Capacity
- E43 Interest Rates: Determination, Term Structure, and Effects
- E58 Central Banks and Their Policies
- F31 Foreign Exchange
- F41 Open Economy Macroeconomics
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