Central Banks’ Dilemma: Reserve Accumulation, Inflation and Financial Instability

No 84, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: Central banks’ international reserves have increased significantly in the recent past. While this accumulation has been widely perceived as precautionary savings to prevent financial crises, rising reserves might also endanger monetary and financial stability. This paper sheds new light on the implications for financial stability and assesses the consequences for monetary policy on theoretical and empirical grounds. Our estimation results show that the accumulation of reserves raises the inflation rate, both on the global and the individual-country level.

Keywords: International Reserves; Inflation; Panel Data Analysis (search for similar items in EconPapers)
JEL-codes: C23 E31 E58 F31 (search for similar items in EconPapers)
Pages: 36
Date: 2010-09-20
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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