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The Empirics of Foreign Reserves

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  • Philip Lane

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  • Dominic Burke

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Abstract

In this article, we study the determinants of cross-country variation in the level of international reserves over the period 1981–1995. Confirming intuition, trade openness is easily the most important variable. There is also some evidence that financial deepening is associated with an increase in the reserves ratio. Smaller and more volatile industrial countries hold larger reserves than their larger, less volatile counterparts. In addition, more indebted developing countries tend to have smaller reserve ratios. We view these results as establishing some interesting stylized facts that may be helpful in informing future theoretical modeling of reserves behavior. Copyright Kluwer Academic Publishers 2001

Suggested Citation

  • Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," Open Economies Review, Springer, vol. 12(4), pages 423-434, October.
  • Handle: RePEc:kap:openec:v:12:y:2001:i:4:p:423-434
    DOI: 10.1023/A:1017939118781
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    References listed on IDEAS

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    1. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-1166, December.
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    4. J. M. Landell-Mills, 1989. "The Demand for International Reserves and Their Opportunity Cost," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 708-732, September.
    5. Frenkel, Jacob A, 1974. "The Demand for International Reserves by Developed and Less-Developed Countries," Economica, London School of Economics and Political Science, vol. 41(161), pages 14-24, February.
    6. Ilan Goldfajn & Rodrigo O. Valdes, 1997. "Capital Flows and the Twin Crises; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
    7. Cottarelli, C. & Giannini, C., 1997. "Credibility without Rules? Monetary Frameworks in the Post-Bretton Woods Era," Papers 312, Banca Italia - Servizio di Studi.
    8. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    9. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-667, September.
    10. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
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    Cited by:

    1. Demarmels, Ricarda & Fischer, Andreas M., 2003. "Understanding reserve volatility in emerging markets: a look at the long-run," Emerging Markets Review, Elsevier, vol. 4(2), pages 145-164, June.
    2. Steiner, Andreas, 2013. "The accumulation of foreign exchange by central banks: Fear of capital mobility?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 409-427.
    3. Marc-André Gosselin & Nicolas Parent, 2005. "An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia," Staff Working Papers 05-38, Bank of Canada.
    4. Joseph Joyce & Raul Razo-Garcia, 2011. "Reserves, quotas and the demand for international liquidity," The Review of International Organizations, Springer, vol. 6(3), pages 393-413, September.
    5. Taufiq Choudhry & Mohammad Hasan, 2008. "Exchange Rate Regime and Demand for Reserves: Evidence from Kenya, Mexico and Philippines," Open Economies Review, Springer, vol. 19(2), pages 167-181, April.
    6. repec:kap:empiri:v:45:y:2018:i:1:d:10.1007_s10663-016-9353-3 is not listed on IDEAS
    7. Drummond, Paulo & Dhasmana, Anubha, 2008. "Foreign Reserve Adequacy in Sub-Saharan Africa," MPRA Paper 9729, University Library of Munich, Germany.
    8. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.
    9. Kasman, Adnan & Ayhan, Duygu, 2008. "Foreign exchange reserves and exchange rates in Turkey: Structural breaks, unit roots and cointegration," Economic Modelling, Elsevier, vol. 25(1), pages 83-92, January.
    10. Gupta, Rangan & Hammoudeh, Shawkat & Kim, Won Joong & Simo-Kengne, Beatrice D., 2014. "Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 170-189.
    11. Pina, Gonçalo, 2015. "The recent growth of international reserves in developing economies: A monetary perspective," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 172-190.
    12. Sona Benecka & Lubos Komarek, 2014. "International Reserves: Facing Model Uncertainty," Working Papers 2014/03, Czech National Bank, Research Department.
    13. Dreher, Axel & Vaubel, Roland, 2009. "Foreign exchange intervention and the political business cycle: A panel data analysis," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 755-775, September.
    14. Ricarda Demarmels & Andreas M. Fischer, 2002. "Understanding Reserve Volatility in Emerging Markets: A Look at the Last Thirty Years," Working Papers 02.02, Swiss National Bank, Study Center Gerzensee.
    15. Gabriela Contreras & Alejandro Jara & Eduardo Olaberría & Diego Saravia, 2012. "On the Level of International Reserves in Chile: an Analysis Based on Complementary Approaches," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 15(3), pages 40-63, December.
    16. Jäger, Kai, 2016. "The Role of Regime Type in the Political Economy of Foreign Reserve Accumulation," European Journal of Political Economy, Elsevier, vol. 44(C), pages 79-96.
    17. Andreas Steiner, 2011. "Do dynamics and heterogeneity in panel data models matter?," Empirical Economics, Springer, vol. 40(1), pages 165-176, February.
    18. Mendoza, Ronald U., 2010. "Was the Asian crisis a wake-up call?: Foreign reserves as self-protection," Journal of Asian Economics, Elsevier, vol. 21(1), pages 1-19, February.
    19. Gopalakrishnan, Balagopal & Mohapatra, Sanket, 2017. "Global Risk and Demand for Gold by Central Banks," IIMA Working Papers WP 2017-01-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    20. Karim Khan & Eatzaz Ahmed, 2005. "The Demand for International Reserves: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 939-957.
    21. Philip R. Lane, 2015. "International Financial Flows in Low-Income Countries," Pacific Economic Review, Wiley Blackwell, vol. 20(1), pages 49-72, February.
    22. Changkyu Choi & Seung-Gwan Baek, 2008. "Exchange-Rate Regimes and International Reserves," Korean Economic Review, Korean Economic Association, vol. 24, pages 105-129.

    More about this item

    Keywords

    foreign reserves; openness; volatility; financial development; external debt;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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