Undervaluation through Foreign
            Reserve Accumulation : Static Losses, Dynamic Gains

Korinek, Anton; Servén, Luis

dc.creator	Korinek, Anton
dc.creator	Servén, Luis
dc.date	2012-03-19T18:38:54Z
dc.date	2012-03-19T18:38:54Z
dc.date	2010-03-01
dc.date.accessioned	2023-02-17T21:02:38Z
dc.date.available	2023-02-17T21:02:38Z
dc.identifier	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100325103944
dc.identifier	http://hdl.handle.net/10986/3737
dc.identifier.uri	http://localhost:8080/xmlui/handle/CUHPOERS/244701
dc.description	This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation "outsources" the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth.
dc.language	English
dc.publisher	Washington, DC: World Bank
dc.relation	Policy Research Working Paper ; No. 5250
dc.rights	CC BY 3.0 IGO
dc.rights	http://creativecommons.org/licenses/by/3.0/igo/
dc.rights	World Bank
dc.subject	ABSOLUTE VALUE
dc.subject	ACCUMULATION OF CAPITAL
dc.subject	ADVERSE SHOCKS
dc.subject	AGENCY PROBLEM
dc.subject	AGENCY PROBLEMS
dc.subject	AGGREGATE CAPITAL STOCK
dc.subject	ALLOCATION OF CAPITAL
dc.subject	AMOUNT OF CAPITAL
dc.subject	BENCHMARK
dc.subject	BUDGET CONSTRAINT
dc.subject	CAPITAL ACCOUNT
dc.subject	CAPITAL ACCOUNT OPENNESS
dc.subject	CAPITAL ACCOUNT RESTRICTIONS
dc.subject	CAPITAL ACCOUNTS
dc.subject	CAPITAL ACCUMULATION
dc.subject	CAPITAL ALLOCATION
dc.subject	CAPITAL FLIGHT
dc.subject	CAPITAL FLOWS
dc.subject	CAPITAL FORMATION
dc.subject	CAPITAL INCOME
dc.subject	CAPITAL INFLOW
dc.subject	CAPITAL INFLOWS
dc.subject	CAPITAL INVESTMENT
dc.subject	CAPITAL MARKET
dc.subject	CAPITAL MARKETS
dc.subject	CAPITAL OUTFLOW
dc.subject	CAPITAL OWNERS
dc.subject	CAPITAL SHARE
dc.subject	CAPITAL SHARES
dc.subject	CAPITAL STOCK
dc.subject	CLOSED CAPITAL ACCOUNTS
dc.subject	CLOSED ECONOMY
dc.subject	COMPARATIVE ADVANTAGE
dc.subject	CONSUMERS
dc.subject	CONSUMPTION GROWTH
dc.subject	COST OF INVESTMENT
dc.subject	CRRA
dc.subject	CURRENCY
dc.subject	CURRENT ACCOUNT
dc.subject	CURRENT ACCOUNT BALANCE
dc.subject	CURRENT ACCOUNT DEFICITS
dc.subject	CURRENT ACCOUNT SURPLUS
dc.subject	DEPRECIATION
dc.subject	DEPRECIATION RATE
dc.subject	DEVALUATION
dc.subject	DEVELOPING COUNTRIES
dc.subject	DEVELOPMENT ECONOMICS
dc.subject	DIFFERENTIAL TAXATION
dc.subject	DISCOUNTED VALUE
dc.subject	DISTORTION
dc.subject	DISTORTIONS
dc.subject	DOMESTIC CAPITAL
dc.subject	DOMESTIC CONSUMPTION
dc.subject	DOMESTIC CURRENCY
dc.subject	DOMESTIC ECONOMY
dc.subject	DOMESTIC INTEREST RATE
dc.subject	DOMESTIC INTEREST RATES
dc.subject	DOMESTIC PRICE
dc.subject	DUTCH DISEASE
dc.subject	ECONOMIC DEVELOPMENT
dc.subject	ECONOMIC GROWTH
dc.subject	ECONOMIC IMPLICATIONS
dc.subject	ELASTICITY
dc.subject	ELASTICITY OF SUBSTITUTION
dc.subject	EMERGING ECONOMIES
dc.subject	EMERGING MARKET
dc.subject	EMERGING MARKET COUNTRIES
dc.subject	EQUILIBRIA
dc.subject	EQUILIBRIUM
dc.subject	EQUILIBRIUM CONDITION
dc.subject	EQUILIBRIUM CONDITIONS
dc.subject	EXCHANGE RATE DEVALUATION
dc.subject	EXPENDITURE
dc.subject	EXPENDITURES
dc.subject	EXPORT SUBSIDIES
dc.subject	EXPORT SUBSIDY
dc.subject	EXTERNALITIES
dc.subject	EXTERNALITY
dc.subject	FACTOR MARKETS
dc.subject	FAIR TRADE
dc.subject	FINANCIAL ASSETS
dc.subject	FINANCIAL SUPPORT
dc.subject	FISCAL POLICY
dc.subject	FOREIGN DIRECT INVESTMENT
dc.subject	FOREIGN INTEREST
dc.subject	FOREIGN INTEREST RATES
dc.subject	FOREIGN INVESTMENT
dc.subject	FOREIGN RESERVE
dc.subject	FOREIGN RESERVES
dc.subject	FRAUD
dc.subject	FREE TRADE
dc.subject	GDP
dc.subject	GENERAL EQUILIBRIUM
dc.subject	GENERAL EQUILIBRIUM MODELS
dc.subject	GLOBAL ECONOMY
dc.subject	GOVERNMENT EXPENDITURE
dc.subject	GOVERNMENT FINANCES
dc.subject	GOVERNMENT INTERVENTION
dc.subject	GOVERNMENT INVESTMENT
dc.subject	GOVERNMENT POLICIES
dc.subject	GOVERNMENT POLICY
dc.subject	GOVERNMENT REVENUE
dc.subject	GOVERNMENT SPENDING
dc.subject	GROWTH MODELS
dc.subject	GROWTH RATE
dc.subject	GROWTH RATES
dc.subject	HOLDING
dc.subject	HOLDINGS
dc.subject	HUMAN CAPITAL
dc.subject	IMPORT
dc.subject	IMPORT TARIFF
dc.subject	IMPORT TARIFFS
dc.subject	IMPORTS
dc.subject	INCOME
dc.subject	INCOME EFFECT
dc.subject	INCREASING RETURNS
dc.subject	INCREASING RETURNS TO SCALE
dc.subject	INDIFFERENCE CURVES
dc.subject	INFANT INDUSTRY ARGUMENT
dc.subject	INFLATION
dc.subject	INSTITUTIONAL CAPACITIES
dc.subject	INSTITUTIONAL CAPACITY
dc.subject	INSTRUMENT
dc.subject	INSURANCE
dc.subject	INTANGIBLE
dc.subject	INTEREST INCOME
dc.subject	INTEREST RATE
dc.subject	INTEREST RATES
dc.subject	INTERNATIONAL BANK
dc.subject	INTERNATIONAL ECONOMICS
dc.subject	INTERNATIONAL INTEREST
dc.subject	INTERNATIONAL INTEREST RATE
dc.subject	INTERNATIONAL PRICE
dc.subject	INTERNATIONAL TRADE
dc.subject	INVESTING
dc.subject	INVESTMENT EXPENDITURES
dc.subject	INVESTMENT OPPORTUNITIES
dc.subject	INVESTMENT RATE
dc.subject	LABOR MARKET
dc.subject	LDCS
dc.subject	LEVEL OF INVESTMENT
dc.subject	LEVIES
dc.subject	MACROECONOMICS
dc.subject	MARGINAL PRODUCT
dc.subject	MARGINAL PRODUCTIVITY
dc.subject	MARKET CONDITION
dc.subject	MARKET EQUILIBRIUM
dc.subject	MARKET INTEREST RATE
dc.subject	MARKET POWER
dc.subject	MARKET PRICE
dc.subject	MARKET PRICES
dc.subject	MERCANTILISM
dc.subject	MONEY HOLDINGS
dc.subject	MULTILATERAL TRADE
dc.subject	NATURAL RESOURCE
dc.subject	NATURAL RESOURCES
dc.subject	NEGATIVE EXTERNALITIES
dc.subject	NET EXPORTS
dc.subject	NOMINAL EXCHANGE RATE
dc.subject	OPEN ECONOMY
dc.subject	OPTIMAL ALLOCATION
dc.subject	OPTIMIZATION
dc.subject	ORGANIZATIONAL CAPITAL
dc.subject	POLICY RESPONSES
dc.subject	POLITICAL ECONOMY
dc.subject	PREVAILING MARKET PRICES
dc.subject	PRIVATE CAPITAL
dc.subject	PRIVATE CAPITAL STOCK
dc.subject	PRIVATE INVESTMENT
dc.subject	PRIVATE INVESTMENTS
dc.subject	PRODUCTION FUNCTION
dc.subject	PRODUCTION FUNCTIONS
dc.subject	PRODUCTIVE INVESTMENT
dc.subject	PRODUCTIVITY
dc.subject	PRODUCTIVITY GROWTH
dc.subject	PROFIT MAXIMIZATION
dc.subject	PUBLIC GOOD
dc.subject	PUBLIC INVESTMENT
dc.subject	PUBLIC ¯ SPENDING
dc.subject	RATE OF RETURN
dc.subject	RATES OF RETURN
dc.subject	REAL COST
dc.subject	REAL EXCHANGE RATE
dc.subject	RELATIVE PRICE
dc.subject	RELATIVE WEIGHTS
dc.subject	RESERVE
dc.subject	RESERVE ACCUMULATION
dc.subject	RESERVES
dc.subject	RETURN
dc.subject	SAVINGS RATE
dc.subject	SAVINGS RATES
dc.subject	SEIGNIORAGE
dc.subject	SLOW GROWTH
dc.subject	SPECULATIVE CAPITAL INFLOWS
dc.subject	STEADY STATE
dc.subject	SUBSTITUTION EFFECT
dc.subject	SUPPLY OF CREDIT
dc.subject	TAX
dc.subject	TAX CREDIT
dc.subject	TAX POLICY
dc.subject	TAX RATE
dc.subject	TAX RATES
dc.subject	TAXATION
dc.subject	TOTAL OUTPUT
dc.subject	TRADABLE GOOD
dc.subject	TRADABLE GOODS
dc.subject	TRADE AGREEMENTS
dc.subject	TRADE DEFICIT
dc.subject	TRADE POLICY
dc.subject	UNDERVALUATION
dc.subject	UTILITY FUNCTION
dc.subject	WAGES
dc.subject	WORLD ECONOMY
dc.subject	WORLD INTEREST RATE
dc.subject	WORLD MARKET
dc.subject	WTO
dc.title	Undervaluation through Foreign Reserve Accumulation : Static Losses, Dynamic Gains
dc.type	Publications & Research :: Policy Research Working Paper