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Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis

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  • Patrick Carvalho
  • Renee A. Fry-McKibbin

Abstract

A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a byproduct of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil’s neighbouring countries, including on their foreign reserve build-ups.

Suggested Citation

  • Patrick Carvalho & Renee A. Fry-McKibbin, 2014. "Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis," CAMA Working Papers 2014-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-18
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-02/18_2014_carvalho_fry-mckibbin.pdf
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    References listed on IDEAS

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    1. repec:cml:moneta:v:xxxv:y:2013:i:1:p:1-35 is not listed on IDEAS
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    3. Guillermo Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2013. "Optimal Holdings of International Reserves: Self-insurance against Sudden Stops," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-35, January-j.
    4. MArdi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin & Chrismin Tang, 2008. "Are Financial Crises Alike?," CAMA Working Papers 2008-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
    6. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, vol. 121(555), pages 905-930, September.
    7. C. Bora Durdu & Enrique G. Mendoza & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism: Working Paper 2007-10," Working Papers 18952, Congressional Budget Office.
    8. Fry-McKibbin, Renée A. & Wanaguru, Sumila, 2013. "Currency intervention: A case study of an emerging market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 25-47.
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    More about this item

    Keywords

    Foreign exchange intervention; currency intervention; exchange rate volatility; reserve accumulation; factor model; emerging markets;

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