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Understanding the Recent Surge in the Accumulation of International Reserves

  • Petar Vujanovic
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    This paper looks at the empirical determinates of foreign currency reserve holdings across a panel of around 130 countries between 1980 and 2008. The paper builds on the existing literature by adopting a panel error-correction model specification and by extending the sample to include the recent period that saw a continuing acceleration in the accumulation of reserves in many countries. The results of the analysis suggest that the levels of trade and domestic financial depth are robust determinates of the level of reserves in the long run, particularly over the past decade and a half. The estimations also find that changes in GDP, the exchange rate regime, exchange rate volatility, and financial openness can all have permanent one-off effects on the level of reserves. Furthermore, country fixed effects are found to be significant, suggesting that time-invariant country specific factors are important in explaining the variance in reserve holdings across countries. Nevertheless, several countries stick out in terms of holding reserves well in excess of that implied by these empirical results, above all in recent years. Among these countries, China and Japan are particularly notable, especially when the deviation from average behaviour is expressed in dollar terms. Comprendre la récente accélération de l'accumulation de réserves internationales Ce document est consacré à l’étude des déterminants économétriques des réserves de change de 1980 à 2008 à partir d’un panel de quelque 130 pays. Il s’appuie sur les publications existantes en adoptant un modèle à correction d’erreurs sur données de panel et en élargissant l’échantillon de façon à couvrir la période récente qui a été marquée par une accélération continue de l’accumulation de réserves dans de nombreux pays. Les résultats de l’analyse tendent à montrer que le volume des échanges commerciaux et la profondeur du système financier national sont des déterminants robustes du volume des réserves sur le long terme, en particulier depuis une quinzaine d’années. Les estimations permettent aussi de constater que des changements en matière de PIB, de régime de change, d’instabilité des cours de change ou d’ouverture financière sont autant de facteurs ponctuels qui peuvent produire un effet permanent sur le volume des réserves. En outre, on observe des effets fixes significatifs spécifiques aux pays, ce qui suggère que des facteurs spécifiques à des pays et invariants dans le temps sont importants pour expliquer la variance des réserves de change entre différents pays. Néanmoins, plusieurs pays continuent à détenir des réserves très supérieures à ce qu’impliquent ces résultats économétriques, surtout ces dernières années. Parmi ces pays, on retiendra en particulier la Chine et le Japon, surtout lorsque l’on exprime en dollars l’écart que présentent ces pays avec le comportement moyen.

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    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 866.

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    Date of creation: 24 May 2011
    Date of revision:
    Handle: RePEc:oec:ecoaaa:866-en
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    1. Enrique G. Mendoza & Ceyhun Bora Durdu & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies; An Assessment of the New Merchantilism," IMF Working Papers 07/146, International Monetary Fund.
    2. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," IDB Publications (Working Papers) 6841, Inter-American Development Bank.
    3. Papaioannou, Elias & Portes, Richard & Siourounis, Gregorios, 2006. "Optimal currency shares in international reserves: the impact of the euro and the prospects for the dollar," Working Paper Series 0694, European Central Bank.
    4. 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.
    5. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
    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.
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    9. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series qt44g3n2j8, Center for International Economics, UC Santa Cruz.
    10. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," International Finance 0407008, EconWPA.
    11. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government.
    12. Jeanne, Olivier & Rancière, Romain, 2008. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," CEPR Discussion Papers 6723, C.E.P.R. Discussion Papers.
    13. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
    14. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
    15. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    16. James Laurenceson & Kam Ki Tang, . "Estimating China�s de-facto capital account convertibility," EAERG Discussion Paper Series 0205, School of Economics, University of Queensland, Australia.
    17. Changkyu Choi & Seung-Gwan Baek, 2008. "Exchange-Rate Regimes and International Reserves," Korean Economic Review, Korean Economic Association, vol. 24, pages 105-129.
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