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Time for a Visible HandLessons from the 2008 World Financial Crisis$
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Stephany Griffith-Jones, José Antonio Ocampo, and Joseph E. Stiglitz

Print publication date: 2010

Print ISBN-13: 9780199578801

Published to Oxford Scholarship Online: February 2010

DOI: 10.1093/acprof:oso/9780199578801.001.0001

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The Accumulation of International Reserves as a Defense Strategy

The Accumulation of International Reserves as a Defense Strategy

Chapter:
(p.269) 15 The Accumulation of International Reserves as a Defense Strategy
Source:
Time for a Visible Hand
Author(s):

Fernando J. Cardim de Carvalho

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199578801.003.0015

The chapter by Carvalho explores the accumulation of international reserves as a defensive strategy, as well as the reasons and limitations of their “self‐insurance” function. Conceptually, countries demand reserves of foreign currencies for a similar set of reasons to those which explain why individuals demand liquidity. However, while individuals hold liquid assets primarily to effect transactions, countries do it mostly for precautionary reasons. Again, as in the case of individuals, the stronger the demand for money, the harder it is to obtain liquidity in public sources and money markets. The chapter notes that international liquidity provision remains as important now as it was in the recent past. Carvalho argues that the best alternative would clearly be an international monetary system where a new international currency could be created according to global liquidity needs, as well as for emergency liquidity facilities to protect countries from adverse temporary external shocks.

Keywords:   international liquidity, reserve accumulation, self‐insurance, new international currency

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