Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
June 1, 2007
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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.
Subject: Balance of payments, Consumption, External position, Foreign assets, Globalization, National accounts, Precautionary savings, Sudden stops
Keywords: business cycle, business cycle volatility, Consumption, D. baseline result, debt limit, effects of Volatility, Foreign assets, Global, globalization period, precautionary demand, Precautionary savings, Sudden Stop economy, Sudden stops, WP
Pages:
54
Volume:
2007
DOI:
Issue:
146
Series:
Working Paper No. 2007/146
Stock No:
WPIEA2007146
ISBN:
9781451867107
ISSN:
1018-5941
