Arce, Fernando. <br/><br/>
A Macroprudential Theory of Foreign Reserve Accumulation / 
Fernando Arce, Julien Bengui, Javier Bianchi. 
 - Cambridge, Mass.  National Bureau of Economic Research  2019. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w26236 .
 - Working Paper Series (National Bureau of Economic Research)  no. w26236. .
<br/><br/> September 2019. 
<br/><br/> This paper proposes a theory of foreign reserves as  macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation.  The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and  can quantitatively account for the recent upward trend in international reserves. 
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