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Beyond Liquidity: New Uses for Developing Asia's Foreign Exchange Reserves

Author

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  • Park, Donghyun

    (Asian Development Bank)

Abstract

Developing Asia's foreign exchange reserves have grown explosively since 2000. Evidence indicates that a substantial part of the region's reserves are now surplus to what is required for traditional liquidity purposes. There is consequently a growing consensus for managing such surplus reserves more actively. The notion that surplus reserves should be used to pursue higher returns is not only politically popular but economically sound. Nevertheless, it is critical to note that developing Asia's reserves are not free fiscal assets. Unlike the reserves themselves, the income from investing those reserves does represent a fiscal dividend for the government. This and other factors suggest that the first-best use of developing Asia's surplus reserves is to invest them abroad with the goal of maximizing risk-adjusted returns, subject to the government's broad guidance. The resulting expansion of fiscal space will help the region's governments tackle the huge long-term developmental challenges still facing the region.

Suggested Citation

  • Park, Donghyun, 2007. "Beyond Liquidity: New Uses for Developing Asia's Foreign Exchange Reserves," ADB Economics Working Paper Series 109, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0109
    as

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    References listed on IDEAS

    as
    1. Marc-André Gosselin & Nicolas Parent, 2005. "An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia," Staff Working Papers 05-38, Bank of Canada.
    2. 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.
    3. Mr. Romain Ranciere & Mr. Olivier D Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 2006/229, International Monetary Fund.
    4. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    developing Asia; fiscal assets; foreign exchange reserves; managing reserves; risk-adjusted returns;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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