Hidehiko Matsumoto

Department of Economics
University of Maryland
College Park, MD 20742

Graduate Program:

Undergraduate Program:


Reserve Accumulation, Foreign Direct Investment, and Economic Growth (Job Market Paper) [PDF]

This paper develops a quantitative small-open-economy model to assess the optimal pace of foreign reserve accumulation by developing countries. The model features endogenous growth with foreign direct investment (FDI) inflows and sudden stops of capital inflows to incorporate benefits of reserve accumulation. In normal times, reserve accumulation depreciates the real exchange rate and attracts FDI, which endogenously promotes productivity growth. When a sudden stop happens, the government provides accumulated reserves to private agents to prevent a severe economic downturn. In terms of costs, reserve accumulation forces lower consumption in the short run and crowds out investment. The calibrated model shows that two factors are the key determinants of the optimal pace of reserve accumulation. First, if the foreign borrowing spread is sensitive to private debt, reserve accumulation causes severe crowding out. Second, if the FDI entry cost is large, reserve accumulation is not effective in attracting FDI. In these cases, the optimal pace of reserve accumulation is slow. The model suggests that once we account for these factors, many developing countries are roughly in line with the optimal pace, but a few countries including China seem to be accumulating reserves too quickly.

Presented at Economic Graduate Students Conference (2017), Midwest Macroeconomics Meetings (2017)

Capital Controls with Firm Dynamics and Endogenous Technical Change

work in progress, with Felipe Saffie