Accumulation Of Foreign Reserves Research Articles

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A Growth Perspective of Foreign Reserve Accumulation

Based on a dynamic open-economy macroeconomic model, this paper aims at understanding the contribution of domestic financial under-development to foreign reserve accumulation in some emerging market economies, especially in China. It is argued that foreign reserve accumulation is a consequence of a growth strategy induced by strong capital investment in a financially constrained economy. It is further proved using a Ramsey problem that purchasing foreign exchange assets is a welfare-improving policy for the social planner when the domestic economy faces two sources of frictions: credit constraint and capital controls. In fact, when domestic firms are occasionally credit-constrained and they do not have a direct access to international financial market, they need domestic saving instrument to increase their retained earnings in order to invest in capital. The central bank/government plays the role of financial intermediary and provides domestic firms with a liquid public bond, thus relaxing the domestic credit constraint. The proceeds of domestic public bonds are then invested abroad due to the limited scope of domestic financial market and a depressed domestic interest rate, leading to foreign reserve stockpiling. The speed of foreign reserve accumulation will slow down with the domestic financial deepening and the development of the domestic financial market.

Recent Issues in Emerging-economies Macroeconomics

In this paper, we summarize the recent advancement of emerging-economies macroeconomics. We begin with stylized facts and models of real business-cycles (RBCs) for emerging-market countries and then move onto the discussion of various issues associated with overborrowings and sovereign debts. The common feature of these models is that their analysis is mainly focused on the framework of RBC models for small open economies combined with financial frictions. We also discuss nominal features of emerging economies that are associated with the behavior of nominal exchange rate and foreign reserves observed during the recent global financial crisis, as well as the practice and impact of conventional and unconventional monetary policy measures. We also present some extensions of existing emerging-economies models that allow for the significant role of conventional monetary and fiscal policies. Our results can be summarized as follows. First, the canonical specification of recent models with pecuniary externalities is modified to allow for channels through which conventional monetary and fiscal policies can affect the degree of pecuniary externalities. Second, we attempt to explain the behavior of nominal exchange rate ‘going up elevators and coming down stairs’ shown in emerging economies during periods of zero lower bounds on the short-term nominal interest rate. Third, we modify a prototypical model of sovereign debt to show the negative correlation between the maturity of foreign debt and the accumulation of foreign reserves when the level of foreign debt is substantially high.

Accumulation of large foreign reserves in China: a behavioural perspective

The massive accumulation of foreign reserves by China has challenged the conventional thinking about prudent reserve management. This paper develops a behavioural model of optimal decision making under uncertainty to explain the observed Chinese reserve policy. Departing from the conventional approach to utility maximisation based on the agent’s rationality, this paper explicitly models the behaviour of Chinese central banker who is influenced by loss aversion and narrow framing. Embedding the cognitive biases into the precautionary savings approach to holding reserves, the paper shows the behavioural optimality of Chinese reserve build-up and provides a plausible explanation of the dynamics of reserve accumulation in China, hence help make sense of the puzzling Chinese reserve policy.

A Study on China’s Huge Foreign Exchange Reserves Security from the Perspective of Structural Optimization

It is a very important issue of improving the structure of foreign exchange reserves. We investigate the foreign exchange reserves security from the perspective of structural optimization. For the Chinese authorities, five aspects of adjustment mechanisms should be comprehensively used to mitigate risks accompanied by the continued accumulation of huge foreign exchange reserves.

Welfare-Enhancing Accumulation of Foreign Reserves

This paper considers if huge accumulation of foreign reserves by some countries is optimal in a simple, intertemporal, and welfare maximization model with loss aversion. The optimality condition is shown to depend on several underlying parameters of the model. Configuration of output shocks and probability of bad state reveal that, controlling other parameters, huge accumulation of foreign reserves of China and Japan is consistently interpreted as optimal within the model. We also consider if external debts serve as alternative optimal precautionary methods. The optimal precautio-nary saving is also shown to be welfare-enhancing with loss aversion.

Limits of Monetary Policy Autonomy by East Asian Debtor Central Banks

Due to buoyant capital inflows East Asian central banks with exchange rate targets accumulate foreign reserves and thereby increase surplus liquidity. East Asian central banks with more flexible exchange rate regimes also face surplus liquidity that mainly emanates from past accumulation of foreign reserves. We show based on an augmented Barro-Gordon-type central bank loss function that in both cases surplus liquidity limits monetary policy autonomy. In case of fixed exchange rates East Asian central banks can escape from the impossible trinity and gain monetary policy autonomy by using non-market–based sterilization which leads to financial sector distortions. In a flexible exchange rate regime monetary policy autonomy can be gained without financial sector distortions by using market-based sterilization. As central banks face substantial sterilization costs as well as revaluation losses on foreign reserves, however, monetary policy autonomy is eroded.

Comment on “Are Asian Sovereign Wealth Funds Different?”

Comment on “Are Asian Sovereign Wealth Funds Different?”

Rethinking the Beijing Consensus: how China responds to crises

This paper discusses the role of the Beijing Consensus type of foreign and economic policymaking in China's development since the Asian financial crisis and in its response to the global crisis, and argues that it has been a double-edged sword, as reflected in several aspects. First, the lesson that China learned from the Asian financial crisis was not the importance of liberalisation but prudence or conservativeness, which despite serving as a shield this time sustains problems in the long term. Second, an obsession with foreign reserves accumulation and the pursuit of political influence have for a long time overshadowed the increasing dependence on the US market, putting China in a dilemma now in both development and diplomatic strategies. Third, centralised decision-making may be faster than democratic processes, but it may also go against the principle of ‘scientific decision’ as proposed by the Chinese leadership. A prominent feature of China's responses to the crisis is a bias towards state-owned enterprises and the public sector, which exacerbates the existing problems of monopoly, over-capacity, inequality, the regulators being ‘captured’ by industrial interests and protectionism. Given limited economic resources, domestic political contentions and the questionable credibility of the China Model, it would be difficult for China to practice ‘responsible great power’ diplomacy or assume leadership in the region or globally.

Monetary autonomy in emerging market economies: The role of foreign reserves

This paper examines trends in monetary autonomy and their interactions with financial integration, currency regimes and foreign reserves for recent decades in emerging Asian and Latin American economies. Our main findings are the following: First, most emerging Asian economies have increased monetary autonomy mainly due to changes in currency regimes toward floating regimes, while emerging Latin American economies have shown mixed results on monetary autonomy. Second, in all sample economies, the accumulation of foreign reserves has contributed to retaining monetary autonomy, probably implying the role of foreign reserves as an anchor for monetary autonomy in emerging market economies.

Policymaking from a 'Macroprudential' Perspective in Emerging Market Economies

Recurrent capital inflows pose important challenges for authorities in emerging market economies seeking to preserve financial stability. Raising interest rates to dampen imbalances that could arise from capital flows can also attract more capital inflows and accentuate appreciation pressures. For this reason authorities have used a number of instruments to mitigate the effects of capital flows, all with financial stability implications. Many of these instruments (eg reserve requirements) may have been used for other purposes but the global financial crisis has raised interest in examining them from a financial stability, or macroprudential perspective. This paper reviews some of these instruments, drawing in part on material provided by central banks to the BIS. The instruments include foreign exchange market intervention and foreign reserve accumulation; measures to strengthen bank balance sheets and capital and measures to maintain the quality of credit or to influence credit growth or allocation, and capital controls. Certain implementation issues are also discussed, including signals to respond to, timing of prudential measures and procyclicality and effectiveness and calibration. An unresolved question is how the instruments described are to be used in conjunction with interest rate policy. Over the medium term, these instruments raise concerns because they may impair the development of the financial system.

SOME SALIENT ISSUES RAISED BY THE GLOBAL FINANCIAL CRISIS

The recent global financial crisis has raised a number of important issues. This paper discusses five specific issues: first, macroprudential regulation, an issue related to the cause of the crisis; second, management of economic openness, an issue especially relevant for emerging market economies; third, diverse measures for coping with instability due to capital outflows, for example self-protection through foreign exchange reserve accumulation as well as international and regional cooperation; fourth, the future of the international monetary system, in particular the dollar-centred system; and fifth, the implications of the crisis for the economics profession.

Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.

Country Insurance and Corporate Risk-Taking

The paper presents a robust but previously undocumented data pattern: corporate risk taking is positively correlated with country-level foreign exchange reserve holdings (as a share of the GDP). With data on 5000 manufacturing firms in 24 emerging economies during 2000-2006, we show that foreign reserve accumulation is economically and statistically associated with higher leverage ratios, lower cash holdings, riskier investments, and higher total and idiosyncratic stock return volatilities. We further show that at least a part of the positive correlation is due to greater corporate risk taking in response to an improvement in a country’s ability to defend against macroeconomic risks associated with a sudden stop in international capital flows. The pattern is stronger for firms that are intrinsically more dependent on external finance for working capital and capital expenditure. It continues to hold when the foreign reserve is instrumented by cumulative trade surpluses. Our finding may provide an explanation for a puzzle during the 2008-2009 global crisis: that higher foreign reserve holdings before the crisis did not translate into less severe corporate difficulties across countries during the crisis.

Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.

Investor States and the Rise of Sovereign Wealth Funds (SWFs)

SWFs manage large financial assets of sovereign states. The ownership by the governments has made it difficult to apply the conventional economic theories to SWFs. On the other hand, the economic nature of investment has made application of international relations theories to these funds more intricate. Almost all scholars (economists or political scientists) contend that the creation of SWFs has been a result of accumulation of foreign reserves. However, they diverge in their position with respect to the purposes of the sovereign funds. The economic view explains the purpose of these funds in terms of economic smoothing and shock absorbing. But economics is only one side of the story. States may have decided to establish sovereign funds for reasons other than economic smoothing or shock absorbing. The main argument here is that the economic view is insufficient in explaining operation and specifically evolution of these funds. In other words, the choices states make regarding the operation and management of sovereign funds can be based on reasons other than maintenance of the domestic economy. This research responds to an academically under-studied yet critical area, by first providing a systematic methodology for the study of these funds at the micro-level, and then applying this methodology to two prominent case studies, i.e., Norway and UAE. A better understanding of the functioning of SWFs is of high importance because it enables both the recipient states and the international community to better address the issues pertaining to SWFS such as governance, code of conduct, etc.

Econometric Analysis of Foreign Reserves and Some Macroeconomic Variables in Nigeria (1970–2007)*

Abstract: Countries are showing interest in accumulating foreign reserves to ensure macroeconomic stability. There has been some debate whether to beef up the level of nations' foreign reserves or make it lower, especially in developing countries like Nigeria. Whereas some argue that the foreign reserve determines the country's rating in the global market, others hold opposing views. In this light, this paper examined the interactive influence of foreign reserve (FRS) on some macroeconomic variables such as: economic size (GDP); trade; level of capital inflows (KFL); exchange rate (EXR); and inflation. Analyzing secondary data from CBN statistical bulletins (1970–2007), the econometric results obtained from cointegration test, vector error correction (VEC) within the framework of autoregressive distributed lags (ARDL) revealed the following: (1) existence of a long‐run relationship between the variables and two cointegrating equations; (2) possibility of convergence of the variables from the short run to the long run with slow speed of adjustment. It is thus the conclusion of this paper that accumulation of large foreign reserves is not very productive in Nigeria due to its inability to induce some of the macroeconomic variables.

Excess liquidity and the foreign currency constraint: the case of monetary management in Guyana

This article examines why commercial banks in Guyana demand nonremunerated excess reserves, a phenomenon that became even more widespread after financial liberalization. Despite the removal of capital controls, banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves. The findings suggest that commercial banks do not demand excess reserves for precautionary purpose–which is the conclusion of several other studies–but rather because of the maintained constraint. The estimated sterilization coefficient is consistent with the hypothesis of an enforced constraint. The results, moreover, suggest an alternative way of looking at the monetary transmission mechanism in developing countries. The central bank maintains price and exchange rate stability through the accumulation of foreign reserves.

Growth Challenges in Latin America: What is Unique About the Region?

Growth Challenges in Latin America: What is Unique About the Region?

An optimal exchange rate interval in a national wealth model

The paper is to explore a reasonable range for exchange rates from the perspective of national wealth and consider the penalty cost elicited by international trade and economic imbalance apart from the accumulation of foreign exchange reserves in the construction of a national wealth model. In this way, this paper introduces the weight concept of value at risk and combines Relative Purchasing Power Parity, International Fisher Effect, and Unbiased Forward Rate hypotheses to assess themacroeconomic penalty cost; it also focuses on money supply variation and the net inflow of foreign capital variation to calculate the money supply penalty cost. This study also uses Renminbi exchange rates to conduct secondary data evaluation; the short-term model shows that the short-term Renminbi optimal exchange rate interval is between and Renminbi to one US Dollar and the adjustment direction should approach the short-term optimal exchange rate Sopt At this time, the short-term reasonable adjusted future value interval of national wealth is US$ 43761.45 (million) ˜US$ 6364.22 (million); the long-termmodel shows that the longterm Renminbi optimal exchange rate interval is between and Renminbi to one US Dollar and the direction of adjustment should approach the long-term optimal exchange rate At this time, the long-term reasonable adjusted future value interval of national wealth is US$ 178234.17 (million) ˜US$–17613.38 (million). The analysis result of numerical examples via the proposed models can not only give a reference for the future development of the Renminbi, but also provide a basis for the adjustment of optimal exchange rate intervals for export-oriented countries to accumulate maximized nationalwealth.