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Are Emerging Asia’s Reserves Really Too High?

  • Marta Ruiz-Arranz
  • Milan Zavadjil
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    Empirical analysis does not suggest that reserves are "too high" in the majority of Asian countries, though China may be a special case. Much of the reserve increase in Asia can be explained by an optimal insurance model under which reserves provide a steady source of liquidity to cushion the impact of a sudden stop in capital inflows on output and consumption. Moreover, the benefits of reserves in terms of reduced spreads on privately held external debt further explains the observed growth in reserves since 1997-98. Using threshold estimation techniques, the paper shows that most of Asia can still benefit from higher reserves in terms of reduced borrowing costs.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/192.

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    Length: 34
    Date of creation: 01 Aug 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/192
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    1. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
    2. Valerie Cerra & Sweta Chaman Saxena, 2003. "Did Output Recover From the Asian Crisis?," IMF Working Papers 03/48, International Monetary Fund.
    3. 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.
    4. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism: Long-Run View of Large International Reserves Hoarding," IMF Working Papers 06/280, International Monetary Fund.
    5. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
    6. Fernando M. Gonçalves, 2007. "The Optimal Level of Foreign Reserves in Financially Dollarized Economies: The Case of Uruguay," IMF Working Papers 07/265, International Monetary Fund.
    7. Eduardo Levy Yeyati, 2006. "The Cost of Reserves," Business School Working Papers 2006-10, Universidad Torcuato Di Tella.
    8. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
    9. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
    10. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    11. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund.
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