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Crowding out redefined: the role of reserve accumulation

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  • Carmen M. Reinhart
  • Takeshi Tashiro
Abstract
It is well understood that investment serves as a shock absorber at the time of crisis. The duration of the drag on investment, however, is perplexing. For the nine Asian economies we focus on in this study, average investment/GDP is about 6 percentage points lower during 1998-2012 than its average level in the decade before the crisis; if China and India are excluded, the estimated decline exceeds 9 percent. We document how in the wake of crisis home bias in finance usually increases markedly as public and private sectors look inward when external financing becomes prohibitively costly, altogether impossible, or just plain undesirable from a financial stability perspective. Also, previous studies have not made a connection between the sustained reserve accumulation and the persistent and significantly lower levels of investment in the region. Put differently, reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out, driven importantly by increased home bias in finance and by official capital outflows. We present evidence from Asia to support this interpretation.

Suggested Citation

  • Carmen M. Reinhart & Takeshi Tashiro, 2013. "Crowding out redefined: the role of reserve accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-43.
    • Handle: RePEc:fip:fedfpr:00008
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    Cited by:

    1. Carlos A. Ibarra, 2016. "Investment, asset market, and the relative unit labor cost in Mexico," Economic Change and Restructuring, Springer, vol. 49(4), pages 339-364, November.
    2. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2014. "Sovereigns, Upstream Capital Flows, And Global Imbalances," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1240-1284, October.
    3. Reinhart, Carmen M. & Reinhart, Vincent & Tashiro, Takeshi, 2016. "Does reserve accumulation crowd out investment?," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 89-111.
    4. Eduardo Levy Yeyati & Jimena Zuniga, 2015. "Varieties of Capital Flows: What Do We Know?," CID Working Papers 296, Center for International Development at Harvard University.
    5. Verikios, George, 2015. "The Implications for Trade And FDI Flows From Liberalisation of China’s Capital Account," Conference papers 332655, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Carmen M. Reinhart & Takeshi Tashiro, 2013. "Crowding out redefined: the role of reserve accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-43.
    7. Alexie ALUPOAIEI & Matei KUBINSCHI & Eugen RĂDULESCU & Alina ZAHARIA-ROTARU, 2024. "Crowding-out, home bias and financial stability in the aftermath of the sovereign debt crisis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(639), S), pages 107-128, Summer.
    8. Denbee, Edd & Jung, Carsten & Paternò, Francesco, 2016. "Stitching together the global financial safety net," Bank of England Financial Stability Papers 36, Bank of England.
    9. Alberola, Enrique & Erce, Aitor & Serena, José Maria, 2016. "International reserves and gross capital flows dynamics," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 151-171.
    10. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(3, Cierre), pages 65-99.
    11. Elissa Braunstein, 2018. "Financial crises among emerging and developing economies in the modern era: A brief history and some stylized themes," Chapters, in: Gerald A. Epstein (ed.), The Political Economy of International Finance in an Age of Inequality, chapter 2, pages 14-29, Edward Elgar Publishing.
    12. Vincent CAUPIN & Stéphanie PAMIES-SUMNER, 2017. "The challenges of India‘s economic policy," Working Paper bda91b64-2f19-4f87-bd32-1, Agence française de développement.
    13. Enrique Alberola & Aitor Erce & José Maria Serena, 2012. "International reserves and gross capital flows: dynamics during financial stress," Globalization Institute Working Papers 110, Federal Reserve Bank of Dallas.
    14. George Verikios, 2018. "Capital Account Liberalisation by China and the Effects on Global FDI and Trade," Global Economic Review, Taylor & Francis Journals, vol. 47(3), pages 245-269, July.
    15. Carlos A. Ibarra, 2015. "Investment and the real exchange rate's profitability channel in Mexico," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(5), pages 716-739, September.
    16. Carlos A. Ibarra, 2018. "Asymmetric real-exchange-rate effects on capital accumulation: evidence from non-linear ARDL models for Mexico," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 27(1), pages 1-24, December.

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F30 - International Economics - - International Finance - - - General

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