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<p>This paper examines the non-reserve currencies’ intrinsic instability and the central bank’s stabilizing role.&#xa0;Following De Lucchi (2022), it develops a balance of payments (BoP) model&#xa0;for non-reserve currency countries -or economies with limited monetary sovereignty- that reconciles long-run real stability with short-run financial instability. On&#xa0;the one hand, the long-run real analysis builds on Canitrot’s (1983) and Olivera’s (1991) contributions to Latin American Structuralism. It assumes a real exchange rate (RER) stability corridor constrained by workers’ bargaining power and trade deficits. On the other hand, the short-run financial analysis is based on Keynes-Minsky’s theory, which is applied to unstable exchange markets. It assumes a “warranted interest rate” that balances financial flows -a non-accelerating depreciation rate of interest for a given stock of foreign reserves. The key conclusion is that short-run financial instability can dominate the overall BoP dynamic even when real flows are balanced due to the faster speed oft financial adjustments relative to real ones. As a result, monetary policy serves as the primary short-run stabilizer when the RER fluctuates within its long-run stability corridor. Finally, this paper offers an explanation for Argentina’s “financial divergence” from Brazil (and other emerging market economies) over the past twenty years through the lens of this model.</p>

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A balance of payments model with non-reserve currency: long-run real stability and short-run financial instability

  • 期刊论文

  • 发表日期：

    2025年6月2日

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  • Juan Matias De Lucchi

摘要

This paper examines the non-reserve currencies’ intrinsic instability and the central bank’s stabilizing role. Following De Lucchi (2022), it develops a balance of payments (BoP) model for non-reserve currency countries -or economies with limited monetary sovereignty- that reconciles long-run real stability with short-run financial instability. On the one hand, the long-run real analysis builds on Canitrot’s (1983) and Olivera’s (1991) contributions to Latin American Structuralism. It assumes a real exchange rate (RER) stability corridor constrained by workers’ bargaining power and trade deficits. On the other hand, the short-run financial analysis is based on Keynes-Minsky’s theory, which is applied to unstable exchange markets. It assumes a “warranted interest rate” that balances financial flows -a non-accelerating depreciation rate of interest for a given stock of foreign reserves. The key conclusion is that short-run financial instability can dominate the overall BoP dynamic even when real flows are balanced due to the faster speed oft financial adjustments relative to real ones. As a result, monetary policy serves as the primary short-run stabilizer when the RER fluctuates within its long-run stability corridor. Finally, this paper offers an explanation for Argentina’s “financial divergence” from Brazil (and other emerging market economies) over the past twenty years through the lens of this model.