Precaution versus mercantilism: Reserve accumulation, capital controls, and the real exchange rate

We document a new international stylized fact on the relationship between external wealth, capital controls, and real exchange rate. first re-confirm that rate appreciates when asset holdings increase, all else equal, central mechanism in economics. However, we find increases publicly held assets (reserves) are associated with depreciation, especially if combined high controls. Reserve accumulation is also larger trade surplus, higher GDP TFP growth, countries The results hold using an instrumental variable for reserves based commodity export surrender requirements. A simple rationale presented to account fact: controls can affect balances via undervaluation (mercantilist motive), while reserve without insure against crises (precautionary motive) independently of rates.