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The determinants of international reserves in the emerging countries: a nonlinear approach

  • Anne-Laure Delatte
  • Julien Fouquau

In this article, we adopt a nonlinear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a Panel Smooth Transition Regression (PSTR) model that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a nonlinear behaviour in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables - out of five candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036846.2010.489886
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 43 (2011)
Issue (Month): 28 ()
Pages: 4179-4192

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Handle: RePEc:taf:applec:v:43:y:2011:i:28:p:4179-4192
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  1. González, Andrés & Teräsvirta, Timo & van Dijk, Dick, 2005. "Panel Smooth Transition Regression Models," SSE/EFI Working Paper Series in Economics and Finance 604, Stockholm School of Economics.
  2. Bessec, Marie & Fouquau, Julien, 2008. "The non-linear link between electricity consumption and temperature in Europe: A threshold panel approach," Energy Economics, Elsevier, vol. 30(5), pages 2705-2721, September.
  3. 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.
  4. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  5. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  6. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  7. Gilbert Colletaz & Christophe Hurlin, 2006. "Threshold Effects of the Public Capital Productivity : An International Panel Smooth Transition Approach," Working Papers halshs-00008056, HAL.
  8. Julien Fouquau & Christophe Hurlin & Isabelle Rabaud, 2007. "The Feldstein-Horioka Puzzle: a Panel SmoothTransition Regression Approach," Working Papers halshs-00156688, HAL.
  9. Aizenman, Joshua & Marion, Nancy P., 2003. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Santa Cruz Department of Economics, Working Paper Series qt9s7978n1, Department of Economics, UC Santa Cruz.
  10. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Wiley Blackwell, vol. 26(6), pages 873-891, 06.
  11. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
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