Asymmetric stabilizing impact of international reserves

This article studies international reserves’ nominal exchange rate stabilizing impact in emerging markets and developing countries, with a particular focus on its nonlinearity and asymmetry across different states of the economy. Using the fixed-effects and dynamic panel threshold models, we find the reserves to short-term debt threshold ratio after which the marginal stabilizing effect of reserves begins to fall during tranquil times. Such diminishing returns, however, do not appear to exist even at the excessive level of reserves during the global financial crisis, partly justifying precautionary demand for international reserves. These results call for extending reserve pooling or swap arrangements to enhance efficiency of reserve management by holding adequate, rather than excess, international reserves with an access to emergency lending during the crisis.