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International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence

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  • Joshua Aizenman
  • Jaewoo Lee

Abstract

This paper compares the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries. Overall, empirical results support precautionary motives; in particular, a more liberal capital account regime increases international reserves. Theoretically, large precautionary demand for international reserves arises as a self-insurance to avoid costly liquidation of long-term projects when the economy is susceptible to sudden stops. The welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
  • Handle: RePEc:kap:openec:v:18:y:2007:i:2:p:191-214
    DOI: 10.1007/s11079-007-9030-z
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    More about this item

    Keywords

    International reserves; Precautionary demand; Mercantilist; Financial crises; F15; F31; F43;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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