Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
By C. B. Durdu, Enrique G. Mendoza, Marco E. Terrones. Social Science Research Network, 2007
268 citations recorded by the source corpus.
Abstract Financial globalization had a rocky start in emerging economies hit by Sudden Stops. Foreign reserves have grown very rapidly since then, as if those countries were practicing a New Mercantilism that views foreign reserves as a war chest for defense against Sudden Stops. This paper conducts a quantitative assessment of this argument using a stochastic intertemporal equilibrium framework in which precautionary foreign asset demand is driven by output variability, financial globalization, and Sudden Stop risk. In this framework, credit constraints produce endogenous Sudden Stops. We find that financial globalization and Sudden Stop risk can explain the surge in reserves but output variability cannot. These results hold using the intertemporal preferences of the Bewley–Aiyagari–Hugget precautionary savings model or the Uzawa–Epstein setup with endogenous impatience.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/e07096910f87a6bc429f546e180d1e190b997c29
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Economics and Econometrics
- Javier Bianchi
- Anton Korinek
- L. Serven
- Enrique G. Mendoza
- C. Calderón
- Joseph E. Stiglitz
- Olivier Jeanne
- Joseph P. Byrne
In Finance
- Javier Bianchi
- Anton Korinek
- L. Serven
- Enrique G. Mendoza
- Joseph E. Stiglitz
- Olivier Jeanne
- Joseph P. Byrne
- E. Davis
Citations in the corpus
- Undervaluation through foreign reserve accumulation: Static losses, dynamic gains (2010, background): “2See e.g. Aizenman and Marion (2003), Durdu et al. (2009), Mendoza et al. (2009) or Carroll and Jeanne (2009) for proponents of this view.”
- Overborrowing and systemic externalities in the business cycle (2009, methodology): “To be consistent with the Sudden Stops definition of Eichengreen et al. (2006), we define Sudden Stops in our model as events where the credit constraint binds and the increase in net capital outflows-to-GDP ratio exceeds one standard deviation.”