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Are Developing Asia’s Foreign Exchange Reserves Excessive? An Empirical Examination

Author

Listed:
  • Park, Donghyun

    (Asian Development Bank)

  • Estrada, Gemma

    (Asian Development Bank)

Abstract

Developing Asian countries have accumulated foreign exchange reserves on an unprecedented scale in recent years. There is a growing consensus that Asia’s reserves now substantially exceed the levels required for precautionary purposes or for self-protection against currency crisis. The central objective of our paper is to informally and formally test whether reserves in developing Asia have in fact reached excessive levels. Informal tests of reserve adequacy based on widely used rules of thumb such as the Greenspan-Guidotti rule unambiguously indicate the presence of sizable excess reserves. To test for excess reserves more formally, we use panel-data econometric analysis based on Edison (2003). Our estimation results indicate the presence of large and growing excess reserves since 2002. The results of both informal and formal tests thus confirm the popular belief that developing Asia now has excessive foreign exchange reserves. Therefore, the short-run policy challenge for Asian governments is to manage the region’s burgeoning excess reserves more actively and use them more productively. One promising area of future research, brought to the fore by the global financial crisis, is to develop more nuanced measures of reserve adequacy that take into account the possibility of severe negative shocks.

Suggested Citation

  • Park, Donghyun & Estrada, Gemma, 2009. "Are Developing Asia’s Foreign Exchange Reserves Excessive? An Empirical Examination," ADB Economics Working Paper Series 170, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0170
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    Cited by:

    1. Gunther Schnabl & Kristina Spantig, 2016. "(De)Stabilizing Exchange Rate Strategies In East Asian Monetary And Economic Integration," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-24, June.
    2. Daniela Gabor, 2011. "Paradigm shift? A critique of the IMF’s new approach to capital controls," Working Papers 1109, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    3. Daniela Gabor, 2012. "Managing Capital Accounts in Emerging Markets: Lessons from the Global Financial Crisis," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 714-731, June.
    4. Aizenman, Joshua & Jinjarak, Yothin & Park, Donghyun, 2011. "International reserves and swap lines: Substitutes or complements?," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 5-18, January.
    5. Zhichao Zhang & Frankie Chau & Li Xie, 2013. "Accumulation of large foreign reserves in China: a behavioural perspective," Economic Change and Restructuring, Springer, vol. 46(1), pages 85-108, March.
    6. Shafaeddin, Mehdi, 2009. "The Impact of the Global Economic Crisis on Industrialization of Least Developed Countries," MPRA Paper 18788, University Library of Munich, Germany.
    7. Joshua Aizenman & Yothin Jinjarak & Donghyun Park, 2011. "Evaluating Asian Swap Arrangements," Governance Working Papers 23239, East Asian Bureau of Economic Research.

    More about this item

    Keywords

    Foreign exchange reserve; Asia;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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