Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210783
Authors: 
Arce, Fernando
Bengui, Julien
Bianchi, Javier
Year of Publication: 
2019
Series/Report no.: 
Bank of Canada Staff Working Paper 2019-43
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 leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross-section, and can quantitatively account for the recent upward trend in international reserves.
Subjects: 
Balance of payment and components
Financial system regulation andpolicies
Financial stability
Foreign reserve management
International financial markets
JEL: 
D52
D62
F34
F38
Document Type: 
Working Paper

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