The massive accumulation of international reserves in developing economies is a puzzling recent development in the world economy. This paper studies reserve accumulation as the outcome of a simple model in which the central bank smooths inflation. I explore the view that central banks accumulate reserves to face large fiscal shocks that need monetary financing. Central bank revenues are obtained through inflation, but inflation is distortionary. As a result, the central bank optimally accumulates international reserves in order to spread the costs associated with inflation over time. A simple numerical exercise for an average developing economy using data between 1970 and 2009 yields fast growth of international reserves.
Pina, G. (2015). The recent growth of international reserves in developing economies: A monetary perspective. Journal of International Money and Finance, 58(Supplement C), 172–190. https://doi.org/10.1016/j.jimonfin.2015.08.009