Shifting Motives: Explaining the Buildup in official Reserves in Emerging Markets Since the 1980's

By Atish R. Ghosh, Jonathan David Ostry, Charalambos G Tsangarides

January 1, 2012

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Atish R. Ghosh, Jonathan David Ostry, and Charalambos G Tsangarides. Shifting Motives: Explaining the Buildup in official Reserves in Emerging Markets Since the 1980's, (USA: International Monetary Fund, 2012) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time?vulnerability to current account shocks was relatively important in the 1980s but, as EMEs have become more financially integrated, factors related to the magnitude of potential capital outflows have gained in importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country's position in the global reserves distribution. High reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks, and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons.

Subject: Balance of payments, Capital account, Central banks, Current account, Exchange rate arrangements, Exchange rates, Foreign exchange, Real exchange rates, Reserves accumulation

Keywords: Capital account, Currency undervaluation, Current account, Current account shock, Exchange rate arrangements, Exchange rate undervaluation, Exchange rates, Global, International Reserves, Mercantilism, Precautionary demand, Quantile Regression, Reserve holding, Reserves accumulation, Short-term debt, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/034
Stock No:

WPIEA2012034
ISBN:

9781463933197
ISSN:

1018-5941

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