The Political Economy of International Finance in an Age of Inequality
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The Political Economy of International Finance in an Age of Inequality

Soft Currencies, Hard Landings

Edited by Gerald A. Epstein

The essays in this book describe and analyze the current contours of the international financial system, covering both developed and developing countries, and focusing on the ways in which the current international financial system structures, and is affected by, profound inequalities in the international system. This keen analysis of key topics in international finance takes a heterodox perspective, with focus on the role of inequalities in power in shaping the structure and outcomes in the international sphere.
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Chapter 6: Easing the trilemma through reserve accumulation? The Latin American case

Luis D. Rosero

Abstract

In the aftermath of the Global Financial Crisis it became widely accepted that the large stock of international reserves accumulated over the past couple of decades by emerging market economies, including those in Latin America, allowed them to minimize the impact of negative global shocks. However, the opportunity costs associated with this precautionary accumulation of reserves must also be kept in mind. Using a vector autoregressive analysis for the largest seven countries in the region, this chapter tests the role that reserve accumulation has played in enhancing the policy tools available to the holding countries. It relies on the trilemma framework to assess the degree (if any) to which increases in reserves are associated with exchange rate stability, capital account openness, and monetary policy independence. Contrary to traditional arguments, it finds limited evidence for the benefits of reserves in easing the trilemma. However, one key finding does emerge, which suggests that only countries with relatively high levels of reserves obtain benefits in terms of their exchange rate stability and monetary policy independence as a result of increases in holdings of foreign reserves.

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