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International Reserves and Central Bank Independence

December 2, 2021

Kuala Lumpur Research Seminar Series

  • 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.

  • Agustin Samano is a research economist in the Macroeconomics and Growth team of the World Bank¡¯s Development Research Group. His research focuses on international macroeconomics and international finance, with a special emphasis on monetary-fiscal issues in emerging market economies. He is currently based at the World Bank's East Asia & Pacific Chief Economist Research Center in Kuala Lumpur, Malaysia. He received his Ph.D. in Economics from the University of Minnesota in 2021.

DETAILS

  • WHEN (KUALA LUMPUR TIME): Thursday, December 2, 2021: 10:00 -11:00am
  • WHEN (ET/WASHINGTON, D.C. TIME): Wednesday, December 1, 2021: 9:00 ¨C 10:00pm