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International Reserves

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Author Info

  • Joshua Aizenman
  • Jaewoo Lee

Abstract

This paper compares the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries. Overall, empirical results support precautionary motives; in particular, a more liberal capital account regime increases international reserves. Theoretically, large precautionary demand for international reserves arises as a self-insurance to avoid costly liquidation of long-term projects when the economy is susceptible to sudden stops. The welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/198.

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Length: 30
Date of creation: 01 Oct 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/198

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Related research

Keywords: Foreign exchange reserves; Economic models; international reserves; hoarding; capital account liberalization; financial intermediation; stock of capital; capital market; volatility of capital flows; capital flows; capital mobility; capital controls; moral hazard; deposit insurance; capital control; deposit interest; capital inflows; short-term capital; discount rate; global capital market; option pricing; net capital;

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References

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  1. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  2. Aizenman, Joshua & Lee, Yeonho & Rhee, Yeongseop, 2004. "International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea," Santa Cruz Department of Economics, Working Paper Series qt1867f7ng, Department of Economics, UC Santa Cruz.
  3. Kravis, Irving B, 1984. "Comparative Studies of National Incomes and Prices," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 1-39, March.
  4. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  5. Eswar Prasad & Shang-Jin Wei, 2007. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 421-480 National Bureau of Economic Research, Inc.
  6. Joshua Aizenman & Nancy Marion, 2002. "The High Demand for International Reserves in the Far East: What's Going On?," NBER Working Papers 9266, National Bureau of Economic Research, Inc.
  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.
  8. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  9. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
  10. Prisman, Eliezer Z. & Slovin, Myron B. & Sushka, Marie E., 1986. "A general model of the banking firm under conditions of monopoly, uncertainty, and recourse," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 293-304, March.
  11. Shang-Jin Wei & Eswar Prasad, 2005. "The Chinese Approach to Capital Inflows," IMF Working Papers 05/79, International Monetary Fund.
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Citations

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Cited by:
  1. Luis F. Brunstein, 2008. "Policies to reduce instability," REVISTA DE ECONOMÍA DEL CARIBE, UNIVERSIDAD DEL NORTE.
  2. Miller, Marcus & Zhang, Lei, 2006. "Fear and Market Failure: Global Imbalances and 'Self-insurance'," CEPR Discussion Papers 6000, C.E.P.R. Discussion Papers.
  3. 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, vol. 121(555), pages 905-930, 09.
  4. Guido Sandleris & Horacio Sapriza & Filippo Taddei, 2008. "Indexed Sovereign Debt: An Applied Framework," Carlo Alberto Notebooks 104, Collegio Carlo Alberto, revised 2011.
  5. Roberto Frankel & Martín Rapetti, 2010. "A Concise History of Exchange Rate Regimes in Latin America," CEPR Reports and Issue Briefs 2010-11, Center for Economic and Policy Research (CEPR).
  6. Suman S. Basu & Ran Bi & Prakash Kannan, 2010. "Regional reserve pooling arrangements," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
  7. Roe, Terry L. & Shane, Mathew & Heerman, Kari, 2011. "Macroeconomic Imbalances in the World Economy," Working Papers 109244, University of Minnesota, Center for International Food and Agricultural Policy.
  8. Asimiyu Gbolagade Abiola & Francis Ojo Adebayo, 2013. "Channelling The Nigeria’s Foreign Exchange Reserves into Alternative Investment Outlets: A Critical Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 813 - 826.
  9. Yilmaz Akyuz, 2008. "Managing Financial Instability in Emerging Markets: A Keynesian Perspective," Working Papers 2008/4, Turkish Economic Association.
  10. Sfia, Mohamed Daly, 2007. "Régimes de change: Le chemin vers la flexibilité," MPRA Paper 4085, University Library of Munich, Germany.
  11. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
  12. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
  13. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
  14. L. Alan Winters & Wonhyuk Lim & Lucia Hanmer & Sidney Augustin, 2010. "Economic growth in low income countries: How the G20 can help to raise and sustain it," Working Paper Series 0810, Department of Economics, University of Sussex.

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