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International Reserves and Swap Lines in Times of Financial Distress: Overview and Interpretations

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  • Aizenman, Joshua

    (Asian Development Bank Institute)

Abstract

In this paper the author reviews the use of precautionary measures aimed at mitigating emerging markets' exposure to fragility associated with financial integration. The discussion draws possible lessons from the ongoing global liquidity crisis. The fear of losing international reserves (IR) constrained most emerging markets more than the fear of floating. The fear of using IR during a crisis suggests that emerging markets (EMs) opt to revisit the gains from financial globalization. High levels of IR may be required for the self insurance offered by those reserves to be effective. Under such circumstances, countries may benefit by supplementing the hoarding of IR with Pigovian tax-cum-subsidy policies. These policies would reduce external borrowing, and would fund the marginal hoarding of IR. The fear of losing IR also suggests a greater demand for regional pooling arrangements and swap lines as well as possible new roles for international financial institutions (IFI).

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File URL: http://www.adbi.org/working-paper/2010/02/05/3454.intl.reserves.swap.lines.financial.distress/
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Bibliographic Info

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 192.

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Length: 23 pages
Date of creation: 05 Feb 2010
Date of revision:
Handle: RePEc:ris:adbiwp:0192

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Keywords: deleveraging; fire-sale congestion externality; swap lines; tax-cum-subsidy; international reserves; Financial Distress;

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References

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  1. Marc Flandreau & Clemens Jobst, 2009. "The Empirics of International Currencies: Network Externalities, History and Persistence," Economic Journal, Royal Economic Society, vol. 119(537), pages 643-664, 04.
  2. Obstfeld, Maurice & Rogoff, Kenneth S, 2005. "The Unsustainable US Current Account Position Revisited," Center for International and Development Economics Research, Working Paper Series qt4f63x50j, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Joshua Aizenman & Gurnain Kaur Pasricha, 2009. "Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation," NBER Working Papers 14821, National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  5. Michael Dooley & David Folkerts-Landau & Peter Garber, 2009. "Bretton Woods Ii Still Defines The International Monetary System," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 297-311, 08.
  6. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc.
  7. Aizenman, Joshua & Jinjarak, Yothin & Park, Donghyun, 2011. "International reserves and swap lines: Substitutes or complements?," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 5-18, January.
  8. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
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  10. Joshua Aizenman & Yi Sun, 2009. "The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'?," NBER Working Papers 15308, National Bureau of Economic Research, Inc.
  11. Joshua Aizenman, 2009. "Hoarding International Reserves Versus a Pigovian Tax-Cum-Subsidy Scheme: Reflections on the Deleveraging Crisis of 2008-9, and a Cost Benefit Analysis," NBER Working Papers 15484, National Bureau of Economic Research, Inc.
  12. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," NBER Working Papers 12345, National Bureau of Economic Research, Inc.
  13. Joshua Aizenman & Yeonho Lee & Yeongseop Rhee, 2004. "International Reserves Management and Capital Mobility in a Volatile World: Policy Considerations and a Case Study of Korea," NBER Working Papers 10534, National Bureau of Economic Research, Inc.
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  16. Aizenman, Joshua & Chinn, Menzie David & Ito, Hiro, 2009. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," Santa Cruz Department of Economics, Working Paper Series qt840728sc, Department of Economics, UC Santa Cruz.
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  20. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
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