Crowding Out Redefined: The Role of Reserve Accumulation / Carmen M. Reinhart, Takeshi Tashiro.

Format:

Book

Author/Creator:

Reinhart, Carmen M.

Contributor:

National Bureau of Economic Research.

Tashiro, Takeshi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19652.

NBER working paper series no. w19652

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Crowding Out Redefined

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

It is well understood that investment serves as a shock absorber at the time of crisis. The duration of the drag on investment, however, is perplexing. For the nine Asian economies we focus on in this study, average investment/GDP is about 6 percentage points lower during 1998-2012 than its average level in the decade before the crisis; if China and India are excluded, the estimated decline exceeds 9 percent. We document how in the wake of crisis home bias in finance usually increases markedly as public and private sectors look inward when external financing becomes prohibitively costly, altogether impossible, or just plain undesirable from a financial stability perspective. Also, previous studies have not made a connection between the sustained reserve accumulation and the persistent and significantly lower levels of investment in the region. Put differently, reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out, driven importantly by increased "liability" home bias in finance and by official capital outflows. We present evidence from Asia to support this interpretation.

Notes:

Print version record

November 2013.