IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2002-062.html

Holding International Reserves in an Era of High Capital Mobility

Author

Listed:
  • Mr. Robert P Flood
  • Ms. Nancy P. Marion

Abstract

Why do countries hold so much international reserves? Global reserve holdings (excluding gold) were equivalent to 17 weeks of imports at the end of 1999. That is almost double what they were at the end of 1960 and about 20 percent higher than they were at the start of the 1990s. In this paper we study countries’ reserve holdings in light of both the increased financial volatility experienced in the last decade and diminished adherence to fixed exchange rates. We find that buffer-stock reserve models work about as well in the modern floating-rate period as they did during the Bretton Woods regime. During both periods, however, the models’ fundamentals explain only a small portion (10-15 percent) of reserves volatility.

Suggested Citation

  • Mr. Robert P Flood & Ms. Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 2002/062, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/062
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=15558
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Saidi, Nasser, 1981. "The square-root law, uncertainty and international reserves under alternative regimes : Canadian experience, 1950-1976," Journal of Monetary Economics, Elsevier, vol. 7(3), pages 271-290.
    2. 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 1148-1166, December.
    3. Huang, Tai-Hsin & Shen, Chung-Hua, 1999. "Applying the seasonal error correction model to the demand for international reserves in Taiwan," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 107-131, January.
    4. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-166, February.
    5. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    6. Lizondo, JoseSaul & Mathieson, Donald J., 1987. "The stability of the demand for international reserves," Journal of International Money and Finance, Elsevier, vol. 6(3), pages 251-282, September.
    7. Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
    8. Dale W. Henderson & Stephen W. Salant, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
    9. repec:bla:econom:v:41:y:1974:i:161:p:14-24 is not listed on IDEAS
    10. 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.
    11. repec:bla:ecorec:v:69:y:1993:i:207:p:411-15 is not listed on IDEAS
    12. Claassen, Emil-Maria, 1975. "Demand for International Reserves and the Optimum Mix and Speed of Adjustment Policies," American Economic Review, American Economic Association, vol. 65(3), pages 446-453, June.
    13. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-514, June.
    14. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    15. repec:bla:econom:v:63:y:1996:i:249:p:81-95 is not listed on IDEAS
    16. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
    17. Levy, Victor, 1983. "Demand for international reserves and exchange-rate intervention policy in an adjustable-peg economy," Journal of Monetary Economics, Elsevier, vol. 11(1), pages 89-101.
    18. Mr. Christian B. Mulder & Mr. Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 1999/088, International Monetary Fund.
    19. Hamada, Koichi & Ueda, Kazuo, 1977. "Random Walks and the Theory of the Optimal International Reserves," Economic Journal, Royal Economic Society, vol. 87(348), pages 722-742, December.
    20. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
    21. Sebastian Edwards, 1981. "The Demand for International Reserves and Exchange Rate Adjustments: The Case of LDC's, 1964-1972," UCLA Economics Working Papers 229, UCLA Department of Economics.
    22. Arthur Grimes, 1993. "International Reserves under Floating Exchange Rates: Two Paradoxes Explained," The Economic Record, The Economic Society of Australia, vol. 69(4), pages 411-415, December.
    23. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    24. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Fernando López Angarita, 2006. "Nivel de reservas internacionales y riesgo cambiario en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 117-159, July-Dece.
    2. Changkyu Choi & Seung-Gwan Baek, 2008. "Exchange-Rate Regimes and International Reserves," Korean Economic Review, Korean Economic Association, vol. 24, pages 105-129.
    3. Cesar Rodrigues van der Laan & André Moreira Cunha, 2008. "Investigating the rationale for exchange market interventions and the building of international reserves in emerging countries: the case of Brazil after stabilization 1995-2008," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807171450510, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
    5. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2009. "What is Driving Reserve Accumulation? A Dynamic Panel Data Approach," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 861-877, September.
    6. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
    7. Roland Beck & Sebastian Weber, 2011. "Should Larger Reserve Holdings Be More Diversified?," International Finance, Wiley Blackwell, vol. 14(3), pages 415-444, December.
    8. Yin‐Wong Cheung & Xingwang Qian, 2009. "Hoarding of International Reserves: Mrs Machlup's Wardrobe and the Joneses," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 824-843, September.
    9. Leonardo Hernandez & Peter Montiel, 2002. "Post-crisis exchange rate policy in five Asian countries: filling in the 'hollow middle'?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    10. Antonio Francisco A. Silva Jr, 2011. "The Self-insurance Role of International Reserves and the 2008-2010 Crisis," Working Papers Series 256, Central Bank of Brazil, Research Department.
    11. Hernandez, Leonardo & Montiel, Peter J., 2003. "Post-crisis exchange rate policy in five Asian countries: Filling in the "hollow middle"?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 336-369, September.
    12. Sula, Ozan, 2008. "Demand for International Reserves: A Quantile Regression Approach," MPRA Paper 11680, University Library of Munich, Germany.
    13. Bar-Ilan, Avner & Marion, Nancy P. & Perry, David, 2007. "Drift control of international reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3110-3137, September.
    14. Tony Cavoli & Ramkishen Rajan, 2003. "Designing Appropriate Exchange Rate Regimes for East Asia: Inflation Targeting and Monetary Policy Rules," Centre for International Economic Studies Working Papers 2003-09, University of Adelaide, Centre for International Economic Studies.
    15. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, vol. 54(5), pages 659-677, July.
    16. Sula, Ozan, 2011. "Demand for international reserves in developing nations: A quantile regression approach," Journal of International Money and Finance, Elsevier, vol. 30(5), pages 764-777, September.
    17. Berg, Andrew & Borensztein, Eduardo & Mauro, Paolo, 2002. "An evaluation of monetary regime options for Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 213-235, December.
    18. Graham Bird & Ramkishen Rajan, 2002. "The Evolving Asian Financial Architecture," Centre for International Economic Studies Working Papers 2002-03, University of Adelaide, Centre for International Economic Studies.
    19. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Wiley Blackwell, vol. 26(6), pages 873-891, June.
    20. Lehto, Taru, 1994. "The level of a central bank's international reserves: theory and cross-country analysis," Bank of Finland Research Discussion Papers 15/1994, Bank of Finland.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2002/062. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.