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Reserve accumulation, inflation and moral hazard: Evidence from a natural experiment

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  • Chiţu, Livia

Abstract

This paper assesses whether international reserve accumulation can be inflationary because of moral hazard and incentive effects. It tests the hypothesis that an increase in international reserves may incentivise countries to become complacent and pursue less prudent policies due to the perceived safety provided by higher reserve holdings. The paper uses a unique natural experiment to solve the endogeneity problem between reserve accumulation and macroeconomic developments, namely the 2009 general allocation of Special Drawing Rights (SDR). This allocation JEL Classification: F30

Suggested Citation

  • Chiţu, Livia, 2016. "Reserve accumulation, inflation and moral hazard: Evidence from a natural experiment," Working Paper Series 1880, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20161880
    Note: 1840305
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1880.en.pdf
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    More about this item

    Keywords

    difference-in-differences; international reserves; moral hazard; natural experiment; propensity score matching estimates; special drawing right;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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