Foreign reserve accumulation, foreign direct investment, and economic growth

This paper develops a quantitative small-open-economy model to study the determinants of optimal pace foreign reserve accumulation by developing countries. In model, depreciates real exchange rate and attracts direct investment (FDI) inflows, which promotes productivity growth through endogenous firm dynamics. The economy is also subject sudden stops in form an occasionally binding constraint on borrowing, accumulated reserves are used prevent severe economic downturns. shows that two factors key accumulation: elasticity borrowing spread with respect debt entry cost for FDI. suggests these can explain substantial amount cross-country variation observed accumulation.