Undervaluation through foreign reserve accumulation: Static losses, dynamic gains

By Anton Korinek, L. Serven. 2010

170 citations recorded by the source corpus.

This paper analyzes foreign reserve accumulation as a second-best policy in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. Under closed capital accounts, reserve accumulation requires an increase in net exports, which reduces the domestic supply of tradable goods, raises their relative price in terms of non-tradable goods – i.e. undervalues the real exchange rate – and stimulates the production of tradable goods. The cost of such a policy is to reduce domestic tradable absorption. However, since the tradable sector generates learning-by-investing externalities, it leads to dynamic gains. Reserve accumulation always increases growth in our framework, but the net welfare effects depend on the balance between the static losses from lower tradable absorption and the dynamic gains from higher growth. We capture this trade-off in a simple analytic formula and depict it in an intuitive graph. We also discuss alternative policy options to reserve accumulation that serve to internalize learning-by-investing externalities.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8e0e4668faa335877ea60c1a1cd260a3a7d6278e

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Citations in the corpus

The New Economics of Prudential Capital Controls: A Research Agenda (2011, background): “Korinek and Serven (2010) argue that neo-mercantilism, that is accumulating reserves to foster exports, is likely to have played a significant role in pushing down world interest rates in the most recent decade.”
Real exchange rate policies for economic development (2017, unknown): “margin, the dynamic gain will dominate (Korinek and Serven, 2016).”
The financial resource curse (2013, unknown): “…that prevent the efficient allocation of resources across firms with different productivity.19 Finally, a recent literature (Aizenman and Lee, 2007; Benigno and Fornaro, 2012; Korinek and Servén, 2010) has used models with growth externalities to address the motives behind reserve accumulation.”
When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth (2013, background): “linked activities (Prasad et al., 2007; Rodrik, 2008; Korinek and Serven, 2010).”
SOVEREIGNS, UPSTREAM CAPITAL FLOWS, AND GLOBAL IMBALANCES: Sovereigns, Upstream Capital Flows, and Global Imbalances (2014, unknown): “Such models are advanced by Dooley, Folkerts-Landau, and Garber (2004), Aizenman and Lee (2008, 2010), Korinek and Serven (2010), and Benigno and Fornaro (2012).”
Capital Account Policies and the Real Exchange Rate (2012, unknown): “Most of those deposits are time and saving deposits that bear an interest rate.”