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

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Author Info
Yin-Wong Cheung ()
Xingwang Qian ()

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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. Individual economy estimation results, however, show that the Joneses effect varies across economies.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2065.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2065

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Related research
Keywords: demand for international reserves; excessive international reserve accumulation; speculative attack; keeping up with the Joneses;

Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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.:

  1. Martin Feldstein, 1999. "Self-Protection for Emerging Market Economies," NBER Working Papers 6907, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-66, December. [Downloadable!] (restricted)
  4. Aizenman, Joshua & Lee, Yeonho & Rhee, Youngseop, 2007. "International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 1-15, March. [Downloadable!] (restricted)
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  5. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
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  6. Robert P. Flood & Nancy Peregrim Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
  7. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November. [Downloadable!] (restricted)
  8. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June. [Downloadable!] (restricted)
  9. Jaewoo Lee, 2004. "Insurance Value of International Reserves: An Option Pricing Approach," IMF Working Papers 04/175, International Monetary Fund. [Downloadable!]
  10. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall. [Downloadable!] (restricted)
  11. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile. [Downloadable!]
  12. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund. [Downloadable!]
  13. Frenkel, Jacob A & Jovanovic, Boyan, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 25-43, August. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Yuko Hashimoto, 2008. "Too Much for Self-Insurance? Asian Foreign Reserves," Working Papers 062008, Hong Kong Institute for Monetary Research. [Downloadable!]
  2. Joshua Aizenman, 2007. "Large Hoarding of International Reserves and the Emerging Global Economic Architecture," NBER Working Papers 13277, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Wong, Clement Yuk-pang & Cheung, Yin-Wong, 2008. "Are All Measures of International Reserves Created Equal? An Empirical Comparison of International Reserve Ratios," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(15), pages 1-61. [Downloadable!]
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