Sudden stops and reserve accumulation in the presence of international liquidity risk

We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the of short-term credit markets. Due pecuniary externality, individual overborrow hold too little relative social planner. This inefficiency rationalizes macroprudential policy intervention form reserve accumulation at central bank stabilize trade real exchange rate. Our quantitatively matches depreciation rate contractions output, gross flows, holdings during Sudden Stops.