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Reserve accumulation - objective or by-product?

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  • Johannes Onno de Beaufort Wijnholds
  • Lars Søndergaard
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    Abstract

    This paper examines whether the level of reserves in emerging market countries has become excessive. It presents a discussion of “adequacy” versus “excessive” levels of reserves, and presents calculations of reserve adequacy for a large number of emerging market countries. Two categories of countries can be distinguished: i) those whose reserves have grown on account of a need for self-insurance against financial crises, and which tend to be reasonably in line with adequacy measures (mainly Latin American countries and countries in central and eastern Europe), and ii) those whose reserve accumulation is nowadays primarily the result of rapid export-led growth supported by a lack of exchange rate flexibility. This is especially the case for several emerging Asian countries, whose reserve levels have grown far beyond what can reasonably considered adequate. Various opinions on Asian exchange rate and reserves policies are examined, and the costs and benefits of currency undervaluation are assessed. Attention is also paid to the composition of the reserves. The paper concludes by bringing together the various strands of the analysis and enumerating the main implications of largescale reserve accumulation for the international monetary system. JEL Classification: F31, F41.

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    Bibliographic Info

    Paper provided by European Central Bank in its series Occasional Paper Series with number 73.

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    Length: 45 pages
    Date of creation: Sep 2007
    Date of revision:
    Handle: RePEc:ecb:ecbops:20070073

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    Related research

    Keywords: International reserve accumulation; emerging markets.;

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    Cited by:
    1. Aristovnik, Aleksander & Čeč, Tanja, 2009. "Compositional Analysis of Foreign Currency Reserves in the 1999-2007 Period : The Euro vs. The Dollar as Leading Reserve Currency," MPRA Paper 14350, University Library of Munich, Germany.

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