Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism
Ceyhun Bora Durdu
Enrique G. Mendoza
Marco E. Terrones
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.


Download Full text
Download Full text
Cite this item
Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 911, 2007.
More from this series
JEL Classification:
Subject headings:
Keywords: Globalization ; Equilibrium (Economics)
For corrections, contact Franz Osorio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal