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Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism

Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism by Enrique G. Mendoza
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Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.
International Monetary Fund; June 2007
54 pages; ISBN 9781452752136
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Title: Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
Author: Enrique G. Mendoza; Ceyhun Bora Durdu; Marco Terrones