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The Economic Policy of Foreign Reserve Accumulation: New International Evidence

Author

Listed:
  • Martín Redrado

    (Central Bank of Argentina)

  • Jorge Carrera

    (Central Bank of Argentina)

  • Diego Bastourre

    (Central Bank of Argentina)

  • Javier Ibarlucia

    (Central Bank of Argentina)

Abstract

This paper aims at identifying the underlying reasons for substantial accumulation of foreign reserves, a strategy currently followed by a large number of countries. To this end, it first studies international liquidity conditions and individual country demand for reserves. It then analyses reserve hoarding by different country groups and its relationship with exchange rate and sterilization policies. Following this, the dynamics of reserves in Argentina is described. Additionally, several adequacy indicators for emerging economies are calculated. After discussing alternative econometric strategies, the paper estimates reserve determinants in a panel of 139 countries employing a generalized method of moments estimator (System GMM). This methodology considerably changes prevailing results. It is found that inertia, regional imitation, both trade and financial openness and income levels are important factors driving reserve hoarding. It is concluded that in the context of asymmetric financial integration, reliance on international liquidity is a feasible way of guaranteeing the stability of monetary and exchange rate policies when real and financial shocks hit an economy. As a policy recommendation, exchange rate flexibility does not turn out to be a substitute for reserve accumulation. Emerging economies combine high international reserve levels with greater exchange rate flexibility as a strategy to face increasing exposure to external shocks.

Suggested Citation

  • Martín Redrado & Jorge Carrera & Diego Bastourre & Javier Ibarlucia, 2006. "The Economic Policy of Foreign Reserve Accumulation: New International Evidence," BCRA Working Paper Series 200614, Central Bank of Argentina, Economic Research Department.
  • Handle: RePEc:bcr:wpaper:200614
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    More about this item

    Keywords

    exchange rate regimes; international liquidity; international reserves; panel data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F30 - International Economics - - International Finance - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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