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Cambridge Journal of Economics Advance Access originally published online on June 27, 2008
Cambridge Journal of Economics 2008 32(5):665-681; doi:10.1093/cje/ben028
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Right arrow E12 - Keynes; Keynesian; Post-Keynesian
Right arrow E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Is the accumulation of international reserves good for development?

Moritz Cruz and Bernard Walters*

* Universidad Nacional Autónoma de México, Mexico and University of Manchester, UK, respectively. The authors are very grateful to two referees for their comments, which have improved the paper substantially. The usual disclaimers apply

Address for correspondence: Moritz Cruz, Universidad Nacional Autónoma de México (UNAM), Instituto de Investigaciones Económicas, Circuito Mario de la Cueva s/n, CU 04510, México; email: aleph3_98{at}yahoo.com

International reserves accumulation has been the preferred policy recently adopted by developing economies to achieve financial stability. The aim of this policy is to increase liquidity and thus reduce the risk of suffering a speculative attack. The main concern expressed in the literature has been related to its cost. Most of the studies conclude that the opportunity cost of international reserves accumulation is around 1% of GDP. However, these studies have not analysed whether this strategy is, or could be, more broadly supportive of development, an issue that must be of central interest for developing economies. The aim of this paper is to show that the stockpiling of international reserves is not optimal for developmental purposes and that there exist alternative policies that can be applied to achieve financial stability, policy autonomy and a better performance in terms of development.

Key Words: International reserves • Financial stability • Speculative attacks • Capital management

JEL classifications: O11, O16, E12, E63, F41

Manuscript received October 13, 2006; final version received May 6, 2008.


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