International Reserves: Precautionary vs. Mercantilist Views, Theory, and Evidence

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International Reserves: Precautionary vs. Mercantilist Views, Theory, and Evidence

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Jaewoo Lee
Joshua Aizenman

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

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Date of creation: 27 Oct 2005
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Handle: RePEc:imf:imfwpa:05/198

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This paper has been announced in the following NEP Reports:

NEP-ALL-2006-03-05 (All new papers)
NEP-FMK-2006-03-05 (Financial Markets)
NEP-IFN-2006-03-05 (International Finance)

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.:

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Other versions:
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Other versions:
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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.)

Kevin Cowan & Sebastián Edwards & Rodrigo Valdés, 2007. "Current Account and External Financing: An Introduction," Working Papers Central Bank of Chile 439, Central Bank of Chile. [Downloadable!]
Sfia, Mohamed Daly, 2007. "Régimes de change: Le chemin vers la flexibilité," MPRA Paper 4085, University Library of Munich, Germany. [Downloadable!]
Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Peterson Institute Working Paper Series WP06-2, Peterson Institute for International Economics. [Downloadable!]
Miller, Marcus & Zhang, Lei, 2006. "Fear and Market Failure: Global Imbalances and 'Self-insurance'," CEPR Discussion Papers 6000, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Marcus Miller & Lei Zhang, 2007. "Fear and Market Failure: Global Imbalances and “Self-Insurance”," RES Working Papers 1076, Inter-American Development Bank, Research Department. [Downloadable!]
Yilmaz Akyuz, 2008. "Managing Financial Instability in Emerging Markets: A Keynesian Perspective," Working Papers 2008/4, Turkish Economic Association. [Downloadable!]
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!]

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