Reserve Policies of East Asian Central Banks: Causes, Consequences and Prospects

This chapter surveys international reserve policies of East Asian central banks. It describes the massive accumulation of foreign exchange reserves since the financial crisis of 1997 and compares the behavior of East Asian countries to that of other emerging markets and the rest of the world. Based on a review of empirical panel data analyses, explanations for rising reserve levels are provided. In particular, mercantilist and precautionary motives, reactions to past financial crises and competitive considerations are discussed. The chapter then assesses the consequences of this reserve demand: Reserve hoarding entails costs and might interfere with domestic monetary policy. Finally, we examine how currency cooperation in East Asia might affect reserve policies. Potential forms of cooperation include bilateral swap agreements and reserve pooling. The Chiang Mai initiative, an illustrative example of reserve pooling, is presented and some ideas for potential improvements are pointed out.