Reserves and currency crises: the role of the exchange rate regime

Although it is widely accepted that more reserves are required to support a peg relative to a more flexible currency, there is lack of empirical evidence motivating this phenomenon. This paper shows evidence that international reserves help countries decrease the probability of a currency crisis. However, the alleviating effect of reserves on the likelihood of currency crises is lower under pegged exchange rate regimes. This result implies that countries with pegged regimes need to accumulate more reserves to avoid currency crises, relative to their peers with more flexible exchange rate regimes.