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Reserve accumulation - objective or by-product?

Author

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  • Johannes Onno de Beaufort Wijnholds
  • Lars Søndergaard

Abstract

This paper examines whether the level of reserves in emerging market countries has become excessive. It presents a discussion of “adequacy” versus “excessive” levels of reserves, and presents calculations of reserve adequacy for a large number of emerging market countries. Two categories of countries can be distinguished: i) those whose reserves have grown on account of a need for self-insurance against financial crises, and which tend to be reasonably in line with adequacy measures (mainly Latin American countries and countries in central and eastern Europe), and ii) those whose reserve accumulation is nowadays primarily the result of rapid export-led growth supported by a lack of exchange rate flexibility. This is especially the case for several emerging Asian countries, whose reserve levels have grown far beyond what can reasonably considered adequate. Various opinions on Asian exchange rate and reserves policies are examined, and the costs and benefits of currency undervaluation are assessed. Attention is also paid to the composition of the reserves. The paper concludes by bringing together the various strands of the analysis and enumerating the main implications of largescale reserve accumulation for the international monetary system. JEL Classification: F31, F41.

Suggested Citation

  • Johannes Onno de Beaufort Wijnholds & Lars Søndergaard, 2007. "Reserve accumulation - objective or by-product?," Occasional Paper Series 73, European Central Bank.
  • Handle: RePEc:ecb:ecbops:20070073
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    Cited by:

    1. Aristovnik, Aleksander & Čeč, Tanja, 2010. "Compositional Analysis Of Foreign Currency Reserves In The 1999-2007 Period. The Euro Vs. The Dollar As Leading Reserve Currency," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 165-181, March.

    More about this item

    Keywords

    International reserve accumulation; emerging markets.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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