The Hoarding of International Reserves: It’s a neighborly day in Asia

To explain why Asian countries seem to have been hoarding international reserves, especially since the 1997 crisis, we consider various regional neighborhood effects. One such effect is that of “catching up with the Joneses” as documented by Cheung and Qian (2009). We revisit that effect by analyzing several refinements of it. We also consider the fear of the kind of contagion that the crisis-hit countries saw in 1997. Finally, we look at the possibility of a regional financial cycle, in which the conditions that led to the crisis might have been correlated across countries. We find that refining the Joneses effect to take account of trade links strengthens its power to explain the build-up of reserves. We also observe that a country that finds itself more vulnerable than its regional neighbors would tend to accumulate more reserves. Finally, we find that a common regional factor related to current-account balances spurs further reserve accumulation. Contrary to previous analyses, our results suggest that only a couple of Asian countries have been holding excessive reserves. Some were actually holding less reserves than would be optimal in the presence of neighborhood effects.