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International reserves management and the current account

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  • Aizenman, Joshua

Abstract

The paper assesses the costs and benefits of active international reserve management (IRM), shedding light on the question of how intense should IRM be for an emerging market. In principle, an active IRM strategy could lower real exchange rate volatility induced by terms of trade shocks; provide self insurance against sudden stops; reduce the speed of adjustment of the current account; and even allow for higher growth if it fosters exports (“mercantilist” motive). The message of the report is mixed – management of reserves is not a panacea. The mercantilist case for hoarding international reserves, as an ingredient of an export led growth strategy, is dubious. Done properly, IRM augments macro economic management in turbulent times, mitigating the impact of external adverse shocks and allowing for a smoother current account adjustment. These benefits are especially important for commodity exporting countries, and countries with limited financial development.

Suggested Citation

  • Aizenman, Joshua, 2007. "International reserves management and the current account," Santa Cruz Department of Economics, Working Paper Series qt22q271t2, Department of Economics, UC Santa Cruz.
  • Handle: RePEc:cdl:ucscec:qt22q271t2
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    Cited by:

    1. Bayoumi, Tamim & Gagnon, Joseph & Saborowski, Christian, 2015. "Official financial flows, capital mobility, and global imbalances," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 146-174.
    2. Moritz Cruz & Peter Kriesler, 2010. "International Reserves, Effective Demand and Growth," Review of Political Economy, Taylor & Francis Journals, vol. 22(4), pages 569-587.
    3. Shrestha, Prakash Kumar, 2013. "Banking Ssystems, central banks and international reserve accumulation in East Asian economies," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-29.
    4. Joshua Aizenman, 2008. "Large Hoarding Of International Reserves And The Emerging Global Economic Architecture," Manchester School, University of Manchester, vol. 76(5), pages 487-503, September.
    5. Torija-Zane, Edgardo, 2015. "Bancos centrales “periféricos”: el caso de América Latina," Libros de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 39989.
    6. Cheung, Yin-Wong & Sengupta, Rajeswari, 2011. "Accumulation of reserves and keeping up with the Joneses: The case of LATAM economies," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 19-31, January.
    7. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
    8. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
    9. Steiner, Andreas, 2014. "Reserve accumulation and financial crises: From individual protection to systemic risk," European Economic Review, Elsevier, vol. 70(C), pages 126-144.
    10. Das, Debasish Kumar, 2012. "Determinants of current account imbalances in the global economy: A dynamic panel analysis," MPRA Paper 42419, University Library of Munich, Germany.

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    More about this item

    Keywords

    International reserve management;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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