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Abstract

This paper examines the extent to which foreign exchange reserves were accumulated or sold during the global financial crisis and what the social costs of any excess accumulation has been. We find that far fewer nations drew on their foreign exchange reserves to defend their currencies and economies from the volatility that ensued during the crisis. What is more, in the wake of the crisis many nations have continued to accumulate reserves. Finally, we estimate that the social costs of foreign exchange accumulation in excess of what is deemed adequate for insurance purposes could be as high as 1.8 per cent of GDP for the developing world, and could be higher than 3 per cent of GDP for China. According to our calculations, the developing world may have between US$98 billion to US$266 billion in assets in excess of what is needed to protect themselves from shocks, or 5 to 16 times the amount of benefits that could be made available by liberalizing world trade under the Doha Round at the World Trade Organization. The recognition within the economics profession and in international financial institutions that capital controls can be effective may provide an opportunity for developing nations to buffer their economies from external shock and free up opportunity for productive investment for development purposes.