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Hoarding of International Reserves: Mrs Machlup¡¦s Wardrobe and the Joneses

  • Yin-wong Cheung

    (University of California, Santa Cruz)

  • XingWang Qian

    (University of California, Santa Cruz)

Motivated by the observed international reserve hoarding behavior in the post-1997 crisis period, we explore the Mrs Machlup's wardrobe hypothesis and the related keeping up with the Joneses argument. It is conceived that, in addition to psychological reasons, holding a relatively high level of international reserves reduces the vulnerability to speculative attacks and promotes growth. A stylized model is constructed to illustrate this type of hoarding behavior. The relevance of the keeping up with the Joneses effect is examined using a few plausible empirical specifications and data from ten East Asian economies. Panel-based regression results are suggestive of the presence of the Joneses effect; especially in the post-1997 crisis period. Individual economy estimation results, however, show that the Joneses effect varies across economies.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 132007.

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Length: 48 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:hkm:wpaper:132007
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  1. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
  2. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 1-90, Wharton School Rodney L. White Center for Financial Research.
  3. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  4. Frenkel, Jacob A & Jovanovic, Boyan, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 25-43, August.
  5. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile.
  6. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
  7. 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.
  8. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June.
  9. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-66, December.
  10. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
  11. Jaewoo Lee, 2004. "Insurance Value of International Reserves; An Option Pricing Approach," IMF Working Papers 04/175, International Monetary Fund.
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