Does foreign reserve accumulation crowd out domestic private investment?

Crawford School of Public Policy | Arndt-Corden Department of Economics

Event details

PhD Seminar (Econ)

Date & time

Friday 28 September 2018


Seminar Room 2, Crawford Building, Lennox Crossing, ANU


Wishnu Mahraddika

Foreign exchange reserve accumulation is one of the preferred strategies to protect against susceptibility to financial crises and to maintain exchange rate competitiveness. Maintaining a healthy international reserve position has the potential to promote domestic investment by reducing the cost of foreign borrowing through improving international creditworthiness. At the same time, contractionary monetary policies implemented as part of reserve accumulation strategies could crowd out domestic private investment. This study examines the effect of foreign reserve accumulation on domestic private investment using a dynamic panel approach. Data for 61 countries over the period 2000–2014 are used. The result indicates that reserve accumulation reduces domestic private investment in the short run, but increases it in the long run. The negative short-run impact is greater for countries with less flexible exchange rate regimes, large current account deficits, and weak domestic financing intermediation.

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