Precautionary demand for foreign assets in sudden stop economies
Subtitle: an assessment of the new mercantilism
By: Ceyhun Bora Durdu, Enrique G. Mendoza, and Marco E. Terrones
Contributors: Mendoza, Enrique G., 1963-; Terrones, Marco; Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 911; International finance discussion papers (Online) -- no. 911.
Publisher: Federal Reserve Board
Published: 2007
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] :
Description: "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"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 12/17/2007.

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