J. Lee; P. Scaramozzino :
062_DP80 Excess Reserves and Macroeconomic Instability
JEL Classification:
D81, E52, F31, F32, F33, F41, F42, F47
Abstract:
This paper is concerned with international reserves. It makes
two main points. Firstly, excess reserves cannot be regarded as a
substitute for sound fundamentals because the former may destabilize the economic system in the longer term. Secondly, reserve accumulation financed by public debt can lead to a potential debt crisis in developing countries. Optimal control theory is employed to illustrate the stabilization problem in an economy in which excess reserves are financed by fiscal deficit.
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