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Are Emerging Asia’s Reserves Really too High?

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  • Marta Ruiz-Arranz
  • Milan Zavadjil
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    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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    Bibliographic Info

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

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    Length: 34
    Date of creation: 01 Aug 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/192

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    Keywords: Foreign exchange reserves; Capital flows; Liquidity; Capital inflows; Production; External debt; Emerging markets; external liabilities; short-term debt; reserve accumulation; reserve holdings; risk aversion; capital outflows; foreign debt; capital market; short term debt; domestic financing; balance of payments; debt stock; border capital flows; central bank; expansion of trade; sovereign debt; capital inflow; stock market capitalization; stock market; reserve assets; central banks; liquid reserve; capital market instruments; reserve bank; capital flow; ratio of debt; current account; external short-term debt; crisis prevention; corporate bonds; short- term debt; domestic credit; hoarding; debt thresholds; short-term debts; short-term capital; current account surpluses; external resources; capital market access; capital accounts;

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    References

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    1. Fernando M. Gonçalves, 2007. "The Optimal Level of Foreign Reserves in Financially Dollarized Economies," IMF Working Papers 07/265, International Monetary Fund.
    2. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism," IMF Working Papers 06/280, International Monetary Fund.
    3. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
    4. Levy Yeyati, Eduardo, 2008. "The cost of reserves," Economics Letters, Elsevier, vol. 100(1), pages 39-42, July.
    5. Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc.
    6. Rodrik, Dani, 2006. "The Social Cost of Foreign Exchange Reserves," CEPR Discussion Papers 5483, C.E.P.R. Discussion Papers.
    7. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
    8. Valerie Cerra & Sweta Chaman Saxena, 2005. "Did Output Recover from the Asian Crisis?," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 1-23, April.
    9. David Hauner, 2005. "A Fiscal Price Tag for International Reserves," IMF Working Papers 05/81, International Monetary Fund.
    10. Marco E. Terrones & Enrique G. Mendoza & Ceyhun Bora Durdu, 2008. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism," 2008 Meeting Papers 56, Society for Economic Dynamics.
    11. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
    12. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
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    Cited by:
    1. Ghosal, Sayantan & Thampanishvong, Kannika, 2009. "Does strengthening Collective Action Clauses (CACs) help?," The Warwick Economics Research Paper Series (TWERPS) 895, University of Warwick, Department of Economics.

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