Excess Reserves and Macroeconomic Instability

29 Pages Posted: 25 Jul 2010

See all articles by Pasquale Scaramozzino

Pasquale Scaramozzino

University of Rome II - Faculty of Economics; University of London - School of Oriental and African Studies (SOAS); University of London - Centre for Financial and Management Studies (CeFIMS)

Jeo Lee

Isle of Man International Business School

Date Written: May 15, 2007

Abstract

This paper is concerned with international reserves. It makes two main points. Firstly, excess reserves cannot be regarded as a substitute for sound fundamentals because the former may destabilize the economic system in the longer term. Secondly, reserve accumulation financed by public debt can lead to a potential debt crisis in developing countries. Optimal control theory is employed to illustrate the stabilization problem in an economy in which excess reserves are financed by fiscal deficit.

Keywords: International Reserves, Fiscal Deficit, Optimal Control Theory, Dynamic Linear Programming.

JEL Classification: D81, E52, F31, F32, F33, F41, F42, F47

Suggested Citation

Scaramozzino, Pasquale and Lee, Jeo, Excess Reserves and Macroeconomic Instability (May 15, 2007). Available at SSRN: https://ssrn.com/abstract=1648325 or http://dx.doi.org/10.2139/ssrn.1648325

Pasquale Scaramozzino

University of Rome II - Faculty of Economics ( email )

Via Columbia n.2
Rome, 00100
Italy

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

University of London - Centre for Financial and Management Studies (CeFIMS)

Thornhaugh Street
London, WC1H 0XG
United Kingdom

Jeo Lee (Contact Author)

Isle of Man International Business School ( email )

The University Centre
Old Castletown Road
Douglas Isle of Man, IM2 1QB
United Kingdom

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