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Shifting Motives

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Author Info

  • Atish R. Ghosh
  • Jonathan David Ostry
  • Charalambos G. Tsangarides

Abstract

Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time?vulnerability to current account shocks was relatively important in the 1980s but, as EMEs have become more financially integrated, factors related to the magnitude of potential capital outflows have gained in importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country''s position in the global reserves distribution. High reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks, and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/34.

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Length: 39
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/34

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Related research

Keywords: Economic models; Emerging markets; Exchange rate regimes; External shocks; Reserves accumulation; Risk management; exchange rate; current account; reserve holdings; short-term debt; exchange rate regime; exchange rates; current account balance; real exchange rate; real exchange rates; exchange rate volatility; nominal exchange rate; reserve accumulation; effective exchange rate; short term debt; undervalued exchange rates; real effective exchange rate; balance of payments; foreign exchange; debt crisis; exchange reserves; exchange rate adjustment; foreign exchange reserves; current accounts; nominal effective exchange rate; fixed exchange rate; currency crises; exchange rate flexibility; undervalued exchange rate; fixed exchange rate regimes; exchange rate pegs; exchange rate misalignment; currency unions; debt outstanding; central banks; exchange arrangements; reserve assets; reserve holding; equilibrium exchange rate; overvalued exchange rate; fixed exchange rate regime; external debt; debt servicing; prevailing exchange rates; floating exchange rate; exchange rate adjustments;

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References

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  1. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments," IMF Occasional Papers 261, International Monetary Fund.
  2. Yin-Wong Cheung & Xingwang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup’s Wardrobe and the Joneses," CESifo Working Paper Series 2065, CESifo Group Munich.
  3. Hamada, Koichi & Ueda, Kazuo, 1977. "Random Walks and the Theory of the Optimal International Reserves," Economic Journal, Royal Economic Society, vol. 87(348), pages 722-42, December.
  4. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  5. Atish R. Ghosh & Jonathan David Ostry & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and the Stability of the International Monetary System," IMF Occasional Papers 270, International Monetary Fund.
  6. 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.
  7. Ricardo J. Caballero & Stavros Panageas, 2003. "Hedging Sudden Stops and Precautionary Contractions," NBER Working Papers 9778, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.).
  10. Anne‐Laure Delatte & Julien Fouquau, 2012. "What Drove the Massive Hoarding of International Reserves in Emerging Economies? A Time‐varying Approach," Review of International Economics, Wiley Blackwell, vol. 20(1), pages 164-176, 02.
  11. Sula, Ozan, 2011. "Demand for international reserves in developing nations: A quantile regression approach," Journal of International Money and Finance, Elsevier, vol. 30(5), pages 764-777, September.
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Citations

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Cited by:
  1. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2013. "International Reserves and Rollover Risk," IMF Working Papers 13/33, International Monetary Fund.
  2. Benigno, Gianluca & Fornaro, Luca, 2012. "Reserve Accumulation, Growth and Financial Crises," CEPR Discussion Papers 9224, C.E.P.R. Discussion Papers.
  3. Nkunde Mwase, 2012. "How much should I hold? Reserve Adequacy in Emerging Markets and Small Islands," IMF Working Papers 12/205, International Monetary Fund.

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