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Are Emerging Asia’s Reserves Really Too High?

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Author Info
Marta Ruiz-Arranz
Milan Zavadjil
Abstract

Empirical analysis does not suggest that reserves are "too high" in the majority of Asian countries, though China may be a special case. Much of the reserve increase in Asia can be explained by an optimal insurance model under which reserves provide a steady source of liquidity to cushion the impact of a sudden stop in capital inflows on output and consumption. Moreover, the benefits of reserves in terms of reduced spreads on privately held external debt further explains the observed growth in reserves since 1997-98. Using threshold estimation techniques, the paper shows that most of Asia can still benefit from higher reserves in terms of reduced borrowing costs.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/192.

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Length: 34 pages
Date of creation: 06 Aug 2008
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Handle: RePEc:imf:imfwpa:08/192

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Keywords: Asia and Pacific ; Reserves ; Liquidity ; Capital inflows ; Production ; Consumption ; External debt ; Emerging markets ;

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  2. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism," International Finance Discussion Papers 911, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics. [Downloadable!]
  4. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Korean International Economic Association, vol. 20(3), pages 253-266, September. [Downloadable!] (restricted)
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  5. Eduardo Levy Yeyati, 2006. "The Cost of Reserves," Business School Working Papers 2006-10, Universidad Torcuato Di Tella. [Downloadable!]
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  6. Christian B. Mulder & Matthieu Bussiere, 1999. "External Vulnerability in Emerging Market Economies - How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund. [Downloadable!]
  7. David Hauner, 2005. "A Fiscal Price Tag for International Reserves," IMF Working Papers 05/81, International Monetary Fund. [Downloadable!]
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  8. Valerie Cerra & Sweta Chaman Saxena, 2003. "Did Output Recover from the Asian Crisis?," IMF Working Papers 03/48, International Monetary Fund. [Downloadable!]
  9. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism: Long-Run View of the Large International Reserves Hoarding," IMF Working Papers 06/280, International Monetary Fund. [Downloadable!]
  10. 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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  12. Fernando M. Goncalves, 2007. "The Optimal Level of Foreign Reserves in Financially Dollarized Economies: The Case of Uruguay," IMF Working Papers 07/265, International Monetary Fund. [Downloadable!]
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