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Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism

Author/Editor: Durdu, Ceyhun Bora | Mendoza, Enrique G. | Terrones, Marco
Authorized for Distribution: June 1, 2007
Electronic Access: Free Full Text (PDF file size is 844KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.
 
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Series: Working Paper No. 07/146
Subject(s): Reserves accumulation | Crisis prevention | Financial crisis | Deflation | Deflation | Dollarization | Globalization | Business cycles | Credit | Economic models
Author's keyword(s): Fisherian deflation | liability dollarization | credit constraints | sudden stops
 
English  
    Published:   June 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007146   Pages:   54
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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