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A Growth Perspective On Foreign Reserve Accumulation

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  • Cheng, Gong
Abstract
Based on a dynamic open-economy macroeconomic model, this paper analyzes the motive for foreign reserve accumulation in fast-growing emerging economies. The demand for foreign reserves stems from the interaction between productivity growth and underdevelopment of the domestic financial market. As domestic firms are credit-constrained, domestic saving instruments are necessary to increase their retained earnings in order to invest in capital. The central bank plays the role of a financial intermediary and provides liquid public bonds while investing the bond proceeds abroad in the form of foreign reserves. Foreign reserve accumulation is thus part of a catching-up strategy in an economy facing financial frictions. During economic transition, foreign reserve accumulation is proved to be welfare-improving as long as private capital flows are controlled. This joint strategy enables the central bank to channel sufficient external funding to the domestic economy while keeping domestic interest rates under control to cope with positive productivity shocks.

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  • Cheng, Gong, 2015. "A Growth Perspective On Foreign Reserve Accumulation," Macroeconomic Dynamics, Cambridge University Press, vol. 19(6), pages 1358-1379, September.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:06:p:1358-1379_00
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    2. Jianu, Ionuț & Pîrșcoveanu, Laura-Mădălina & Tudorache, Maria-Daniela, 2017. "The impact of financial risks on economic growth in EU-15," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(1 (610)), pages 23-44.
    3. Luigi Bonatti & Andrea Fracasso, 2016. "Modelling The Transition Towards The Renminbi'S Full Convertibility: Implications For China'S Growth," Bulletin of Economic Research, Wiley Blackwell, vol. 68(S1), pages 146-170, December.
    4. Cheng, Gong, 2015. "Balance sheet effects, foreign reserves and public policies," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 146-165.
    5. Jung, Kuk Mo & Pyun, Ju Hyun, 2016. "International reserves for emerging economies: A liquidity approach," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 230-257.
    6. Andrea Fracasso, 2015. "Economic Rebalancing and Growth: the Japanese experience and China’s prospects," DEM Discussion Papers 2015/07, Department of Economics and Management.
    7. Bussière, Matthieu & Cheng, Gong & Chinn, Menzie D. & Lisack, Noëmie, 2015. "For a few dollars more: Reserves and growth in times of crises," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 127-145.
    8. Cheng, Gong, 2015. "A Growth Perspective On Foreign Reserve Accumulation," Macroeconomic Dynamics, Cambridge University Press, vol. 19(6), pages 1358-1379, September.
    9. Oladejo Tokunbo Bada & Kehinde Adekunle Adetiloy & Felicia Omowunmi Olokoyo, 2022. "Educational Factors As Determinant Of International Reserves Accumulation In Organisation Of Petroleum Exporting Countries," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 8(2).
    10. Ionuţ JIANU & Laura-Mădălina PÎRȘCOVEANU & Maria-Daniela TUDORACHE, 2017. "The impact of financial risks on economic growth in EU-15," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 23-44, Spring.
    11. Scheubel, Beatrice & Stracca, Livio & Tille, Cédric, 2019. "Taming the global financial cycle: What role for the global financial safety net?," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 160-182.
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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