Advanced Search
MyIDEAS: Login to save this article or follow this journal

International Reserves in Emerging Market Countries: Too Much of a Good Thing?

Contents:

Author Info

  • Olivier Jeanne

    (International Monetary Fund)

Abstract

This paper considers whether the recent buildup in emerging market countries’ international reserves can be justified as precautionary insurance against volatility in capital flows. It presents a simple, welfare-based model of the optimal level of reserves to deal with the risk of capital account crises and calibrates the model for emerging market countries. The levels of reserves observed in many countries in the recent period, in particular in Latin America, are found to be within the range of the model’s predictions. However, the reserves buildup in Asian emerging market countries seems difficult to justify on precautionary grounds. A large fraction of their reserves could thus be diversified into less liquid but higher-yielding foreign assets. The paper concludes by discussing the challenges and opportunities associated with the management of large quantities of sovereign assets in emerging market countries.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2007_1_bpea_papers/2007a_bpea_jeanne.pdf
Download Restriction: no

Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 38 (2007)
Issue (Month): 1 ()
Pages: 1-80

as in new window
Handle: RePEc:bin:bpeajo:v:38:y:2007:i:2007-1:p:1-80

Contact details of provider:
Postal: 1775 Massachusetts Ave NW, Washington DC 20036
Phone: (202) 797-6000
Fax: (202) 797-6004
Email:
Web page: http://www.brookings.edu/economics.aspx
More information through EDIRC

Related research

Keywords: International reserves; macroeconomics; emerging market countries;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Graham Bird & Ramkishen Rajan, 2002. "Too Much of a Good Thing?: The Adequacy of International Reserves in the Aftermath of Crises," Centre for International Economic Studies Working Papers, University of Adelaide, Centre for International Economic Studies 2002-10, University of Adelaide, Centre for International Economic Studies.
  2. Hutchison, Michael M. & Noy, Ilan, 2006. "Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets," Journal of Development Economics, Elsevier, Elsevier, vol. 79(1), pages 225-248, February.
  3. David Hauner, 2005. "A Fiscal Price Tag for International Reserves," IMF Working Papers, International Monetary Fund 05/81, International Monetary Fund.
  4. Jaewoo Lee, 2004. "Insurance Value of International Reserves," IMF Working Papers, International Monetary Fund 04/175, International Monetary Fund.
  5. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt5pv1j341, Center for International Economics, UC Santa Cruz.
  6. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt7g18546z, Center for International Economics, UC Santa Cruz.
  7. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  8. Miller, Marcus & Zhang, Lei, 2006. "Fear and Market Failure: Global Imbalances and 'Self-insurance'," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6000, C.E.P.R. Discussion Papers.
  9. Philip D Wooldridge, 2006. "The changing composition of official reserves," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  10. Pierre-Olivier Gourinchas & Olivier Jeanne, 2007. "Capital Flows to Developing Countries: The Allocation Puzzle," NBER Working Papers 13602, National Bureau of Economic Research, Inc.
  11. Ricardo Caballero & Stavros Panageas, 2005. "A Quantitative Model of Sudden Stops and External Liquidity Management," NBER Working Papers 11293, National Bureau of Economic Research, Inc.
  12. Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc.
  13. Aizenman, Joshua & Lee, Yeonho & Rhee, Yeongseop, 2004. "International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt1867f7ng, Center for International Economics, UC Santa Cruz.
  14. C. Bora Durdu & Enrique G. Mendoza & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism: Working Paper 2007-10," Working Papers, Congressional Budget Office 18952, Congressional Budget Office.
  15. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves," IMF Working Papers, International Monetary Fund 05/198, International Monetary Fund.
  16. Hamada, Koichi & Ueda, Kazuo, 1977. "Random Walks and the Theory of the Optimal International Reserves," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 87(348), pages 722-42, December.
  17. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  18. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  19. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, Elsevier, vol. 33(3-4), pages 345-362, November.
  20. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series, Peterson Institute for International Economics WP06-2, Peterson Institute for International Economics.
  21. Yin-Wong Cheung & Xingwang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup’s Wardrobe and the Joneses," CESifo Working Paper Series, CESifo Group Munich 2065, CESifo Group Munich.
  22. M. Nowak & Ketil Hviding & Luca Antonio Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers, International Monetary Fund 04/189, International Monetary Fund.
  23. M S Mohanty & Philip Turner, 2006. "Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  24. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 911, Board of Governors of the Federal Reserve System (U.S.).
  25. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(8), pages 1430-1452, December.
  26. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity," IMF Working Papers, International Monetary Fund 01/2, International Monetary Fund.
  27. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 241-270.
  28. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers, International Monetary Fund 99/88, International Monetary Fund.
  29. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile, Central Bank of Chile 299, Central Bank of Chile.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bin:bpeajo:v:38:y:2007:i:2007-1:p:1-80. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Eric Encarnacion).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.