International Reserves and Central Bank Independence

International Reserves and Central Bank Independence

This paper proposes a novel theory of reserve accumulation that emphasizes the role of an independent central bank. Motivated by a positive correlation between reserve accumulation and central bank independence in Latin America, the paper develops...

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Bibliographic Details
Main Author: Samano, Agustin
Format: Working Paper
Language:English
Published: World Bank, Washington, DC 2021
Subjects:
INTERNATIONAL RESERVES
CENTRAL BANK INDEPENDENCE
SOVEREIGN DEBT
RESERVE ACCUMULATION
EXCHANGE RATE REGIME
CURRENCY
Online Access:http://documents.worldbank.org/curated/undefined/620131635859663291/International-Reserves-and-Central-Bank-Independence
http://hdl.handle.net/10986/36483
id okr-10986-36483
recordtype oai_dc
spelling okr-10986-364832021-11-05T05:10:44Z International Reserves and Central Bank Independence Samano, Agustin INTERNATIONAL RESERVES CENTRAL BANK INDEPENDENCE SOVEREIGN DEBT RESERVE ACCUMULATION EXCHANGE RATE REGIME CURRENCY This paper proposes a novel theory of reserve accumulation that emphasizes the role of an independent central bank. Motivated by a positive correlation between reserve accumulation and central bank independence in Latin America, the paper develops a quantitative sovereign default model with an independent central bank that can accumulate a risk-free foreign asset. The findings show that if the central bank is more patient than the government and as patient as households are, in equilibrium, the government issues more debt than what is socially optimal, and the central bank accumulates reserves to undo government over-borrowing. A key insight is that the government can issue more debt for any level of reserves but chooses not to because doing so would increase sovereign spreads, making it more costly to borrow. Quantitatively, the analysis finds that the central bank independence channel accounts for 75 percent of the average reserve levels observed in Mexico from 1994 to 2017. Finally, the paper shows that accumulating reserves improves social welfare. Welfare gains come from reducing the costs of front-loading public spending. 2021-11-04T18:14:03Z 2021-11-04T18:14:03Z 2021-11 Working Paper http://documents.worldbank.org/curated/undefined/620131635859663291/International-Reserves-and-Central-Bank-Independence http://hdl.handle.net/10986/36483 English Policy Research Working Paper;No. 9832 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Latin America & Caribbean Mexico
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic INTERNATIONAL RESERVES
CENTRAL BANK INDEPENDENCE
SOVEREIGN DEBT
RESERVE ACCUMULATION
EXCHANGE RATE REGIME
CURRENCY
spellingShingle INTERNATIONAL RESERVES
CENTRAL BANK INDEPENDENCE
SOVEREIGN DEBT
RESERVE ACCUMULATION
EXCHANGE RATE REGIME
CURRENCY
Samano, Agustin
International Reserves and Central Bank Independence
geographic_facet Latin America & Caribbean
Mexico
relation Policy Research Working Paper;No. 9832
description This paper proposes a novel theory of reserve accumulation that emphasizes the role of an independent central bank. Motivated by a positive correlation between reserve accumulation and central bank independence in Latin America, the paper develops a quantitative sovereign default model with an independent central bank that can accumulate a risk-free foreign asset. The findings show that if the central bank is more patient than the government and as patient as households are, in equilibrium, the government issues more debt than what is socially optimal, and the central bank accumulates reserves to undo government over-borrowing. A key insight is that the government can issue more debt for any level of reserves but chooses not to because doing so would increase sovereign spreads, making it more costly to borrow. Quantitatively, the analysis finds that the central bank independence channel accounts for 75 percent of the average reserve levels observed in Mexico from 1994 to 2017. Finally, the paper shows that accumulating reserves improves social welfare. Welfare gains come from reducing the costs of front-loading public spending.
format Working Paper
author Samano, Agustin
author_facet Samano, Agustin
author_sort Samano, Agustin
title International Reserves and Central Bank Independence
title_short International Reserves and Central Bank Independence
title_full International Reserves and Central Bank Independence
title_fullStr International Reserves and Central Bank Independence
title_full_unstemmed International Reserves and Central Bank Independence
title_sort international reserves and central bank independence
publisher World Bank, Washington, DC
publishDate 2021
url http://documents.worldbank.org/curated/undefined/620131635859663291/International-Reserves-and-Central-Bank-Independence
http://hdl.handle.net/10986/36483
_version_ 1764485342173331456

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