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Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis

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Author Info

  • Patrick Carvalho
  • Renee A. Fry-McKibbin

Abstract

A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a byproduct of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil’s neighbouring countries, including on their foreign reserve build-ups.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-18.

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Length: 41 pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-18

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Related research

Keywords: Foreign exchange intervention; currency intervention; exchange rate volatility; reserve accumulation; factor model; emerging markets;

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References

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  1. MArdi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin & Chrismin Tang, 2008. "Are Financial Crises Alike?," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2008-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(555), pages 905-930, 09.
  3. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 2(2), pages 57-94, April.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2012. "Optimal Holdings of International Reserves: Self-Insurance against Sudden Stop," NBER Working Papers 18219, National Bureau of Economic Research, Inc.
  5. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  6. Fry-McKibbin, Renée A. & Wanaguru, Sumila, 2013. "Currency intervention: A case study of an emerging market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 37(C), pages 25-47.
  7. C. Bora Durdu & Enrique G. Mendoza & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism: Working Paper 2007-10," Working Papers, Congressional Budget Office 18952, Congressional Budget Office.
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