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International Reserves and Swap Lines in Times of Financial Distress: Overview and Interpretations

  • Joshua Aizenman

In this paper I review the use of precautionary measures aimed at mitigating emerging markets’ exposure to fragility associated with financial integration. The discussion draws possible lessons from the ongoing global liquidity crisis. The fear of losing international reserves (IR) constrained most emerging markets more than the fear of floating. The fear of using IR during a crisis suggests that emerging markets (EMs) opt to revisit the gains from financial globalization. High levels of IR may be required for the self insurance offered by those reserves to be effective. Under such circumstances, countries may benefit by supplementing the hoarding of IR with Pigovian tax-cum-subsidy policies. These policies would reduce external borrowing, and would fund the marginal hoarding of IR. The fear of losing IR also suggests a greater demand for regional pooling arrangements and swap lines as well as possible new roles for international financial institutions (IFI). [ADBI Working Paper 192]

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Date of creation: Oct 2010
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Handle: RePEc:ess:wpaper:id:3022
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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  2. Joshua Aizenman, 2009. "Hoarding International Reserves Versus a Pigovian Tax-Cum-Subsidy Scheme: Reflections on the Deleveraging Crisis of 2008-9, and a Cost Benefit Analysis," NBER Working Papers 15484, National Bureau of Economic Research, Inc.
  3. Rodrik, Dani, 2006. "The Social Cost of Foreign Exchange Reserves," CEPR Discussion Papers 5483, C.E.P.R. Discussion Papers.
  4. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  5. Aizenman, Joshua & Sun, Yi, 2012. "The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’?," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 250-269.
  6. Yin-Wong Cheung & Xingwang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup’s Wardrobe and the Joneses," CESifo Working Paper Series 2065, CESifo Group Munich.
  7. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
  8. Aizenman, Joshua & Jinjarak, Yothin & Park, Donghyun, 2011. "International reserves and swap lines: Substitutes or complements?," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 5-18, January.
  9. Sebastian Edwards & Márcio G. P. Garcia, 2008. "Financial Markets Volatility and Performance in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa05-1, January.
  10. Joshua Aizenman & Gurnain Kaur Pasricha, 2009. "Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation," NBER Working Papers 14821, National Bureau of Economic Research, Inc.
  11. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries; Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
  12. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," NBER Working Papers 12345, National Bureau of Economic Research, Inc.
  13. Aizenman, Joshua & Lee, Yeonho & Rhee, Yeongseop, 2004. "International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea," Santa Cruz Department of Economics, Working Paper Series qt1867f7ng, Department of Economics, UC Santa Cruz.
  14. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  15. Paul Krugman, 2000. "Fire-Sale FDI," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 43-58 National Bureau of Economic Research, Inc.
  16. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  17. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2004. "Smoothing sudden stops," Journal of Economic Theory, Elsevier, vol. 119(1), pages 104-127, November.
  18. Aizenman, Joshua & Chinn, Menzie David & Ito, Hiro, 2009. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," Santa Cruz Department of Economics, Working Paper Series qt840728sc, Department of Economics, UC Santa Cruz.
  19. Marc Flandreau & Clemens Jobst, 2009. "The Empirics of International Currencies: Network Externalities, History and Persistence," Economic Journal, Royal Economic Society, vol. 119(537), pages 643-664, 04.
  20. Michael Dooley & David Folkerts-Landau & Peter Garber, 2009. "Bretton Woods Ii Still Defines The International Monetary System," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 297-311, 08.
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