Reserve accumulation and financial crises: From individual protection to systemic risk

Autor(en): Steiner, Andreas
Stichwörter: Business & Economics; CURRENCY CRISES; Economics; EXCHANGE-RATE; Financial crises; Global imbalances; INTERNATIONAL RESERVES; Macro-prudential policies; MATURITY; MODELS; MONEY; SHORT-TERM DEBT; Systemic risk; VULNERABILITY; WORLD
Erscheinungsdatum: 2014
Herausgeber: ELSEVIER
Volumen: 70
Startseite: 126
Seitenende: 144
This paper 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 relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre, which is transmitted globally. According to this ``global'' view reserve accumulation might destabilize the international financial system. Since the crisis affects all countries alike, the accumulation of reserves imposes a negative externality on non-accumulating countries. We integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality: the consideration of systemic risk lowers the demand for reserves. Moreover, if a supranational authority determines the optimal level of reserves, it internalizes the negative externality and accumulates fewer reserves. A macroprudential tax on reserve hoardings might implement the socially optimal solution. Our calibration analysis shows that these considerations are economically significant: they lower the optimal amount of reserves in the benchmark case by 45%. (C) 2014 Elsevier B.V. All rights reserved.
ISSN: 00142921
DOI: 10.1016/j.euroecorev.2014.04.005

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