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Hoarding of International Reserves: Mrs Machlup's Wardrobe and the Joneses

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  • Yin-Wong Cheung
  • Xingwang Qian

Abstract

Motivated by the observed international reserve hoarding behavior in the post-1997 crisis period, we explore the Mrs Machlup's Wardrobe hypothesis and the related keeping up with the Joneses argument. It is conceived that, in addition to psychological reasons, holding a relatively high level of international reserves reduces the vulnerability to speculative attacks and promotes growth. A stylized model is constructed to illustrate this type of hoarding behavior. The relevance of the keeping up with the Joneses effect is examined using a few plausible empirical specifications and data from 10 East Asian economies. Panel-based regression results are suggestive of the presence of the Joneses effect, especially in the post-1997 crisis period. Copyright � 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 17 (2009)
Issue (Month): 4 (09)
Pages: 824-843

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Handle: RePEc:bla:reviec:v:17:y:2009:i:4:p:824-843

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  1. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc.
  2. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
  3. Martin Feldstein, 1999. "Self-Protection for Emerging Market Economies," NBER Working Papers 6907, National Bureau of Economic Research, Inc.
  4. Joshua Aizenman & Yeonho Lee & Yeongseop Rhee, 2004. "International Reserves Management and Capital Mobility in a Volatile World: Policy Considerations and a Case Study of Korea," NBER Working Papers 10534, National Bureau of Economic Research, Inc.
  5. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
  6. 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.
  7. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
  8. Pablo García & Claudio Soto, 2006. "Large Hoardings of International Reserves: Are They Worth It?," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 6, pages 171-206 Central Bank of Chile.
  9. Frenkel, Jacob A & Jovanovic, Boyan, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 95(1), pages 25-43, August.
  10. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 9(4), pages 1148-66, December.
  11. Jaewoo Lee, 2004. "Insurance Value of International Reserves," IMF Working Papers 04/175, International Monetary Fund.
  12. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
  13. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(362), pages 507-14, June.
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