Abstract
In “Reserve Accumulation and Financial Crises: From Individual Protection to Systemic Risk” we integrate the findings of the previous two chapters – central banks' reserve accumulation lowers the current account balance and the public budget balance of reserve currency countries – in a model of the optimal demand for reserves. It provides a new perspective on the relationship between countries' international reserve holdings and financial crises: While the “local” view holds that reserves may prevent domestic crises, it overlooks that the accumulation of reserves eases the financing constraint of the reserve currency country and may cause a financial crisis in the center, which is transmitted globally. Since the crisis affects all countries alike, the accumulation of reserves imposes a negative externality on non-accumulating countries.
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