Financial Stability, the Trilemma, and International Reserves
Maurice ObstfeldUniversity of California, Berkeley, Department of Economics, 508-1 Evans Hall #3880, University of California, Berkeley, CA 94720-3880, National Bureau of Economic Research, and Center for Economic and Policy ResearchJay ShambaughDartmouth College, Department of Economics, HB 6106, Dartmouth College, Hanover NH 03755 and NBERAlan M. TaylorUniversity of California, Davis, Department of Economics, University of California, One Shields Avenue, Davis, CA 95616-8578, NBER, and CEPR
2010en
ABI
Abstract
The rapid growth of international reserves, a development concentrated in the emerging markets, remains a puzzle. In this paper, we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt. (JEL E23, E43, E44, F31, F32, F34)
Identifiers
Citations and references
Cited by 20 references