NBER Working Paper: A Macroprudential Theory of Foreign Reserve Accumulation

Author(s):Fernando Arce, Julien Bengui, Javier Bianchi Date:September 2019 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 overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy[…]