Estimating the Demand for Reserve Assets Across Diverse Groups

By Rina Bhattacharya, Katja Mann, Mwanza Nkusu

March 9, 2018

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Rina Bhattacharya, Katja Mann, and Mwanza Nkusu. Estimating the Demand for Reserve Assets Across Diverse Groups, (USA: International Monetary Fund, 2018) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper takes a fresh look at the determinants of reserves holding with the aim of highlighting similarities and differences in the motives for holding reserves among emerging markets (EMs), advanced economies (AEs), and low-income countries (LICs). We apply two panel estimation techniques: fixed effects (FE) and common correlated effects pooled mean group (CCEPMG). FE regression results suggest that precautionary savings motives, both current account- and capital account-related, are generally the most important determinants of reserves holding across country groups and that their importance has increased for AEs and LICs since the global financial crisis while receding for EMs. Mercantilist motives matter mostly for EMs. Intertemporal motives have been gaining importance everywhere over time. The CCEPMG results confirm the importance of precautionary motives and suggest that current account motives matter only for EMs and LICs and capital account motives matter for all groups while being more important for EMs in both the shortand long runs. The CCEPMG results also point to the importance of taking into account unobserved common factors that affect coefficient estimates and the dynamic process through which reserves adjust to changes. At about 0.6, the speed of adjustment to the long-run equilibrium implies that more than half of the gap between actual and desired reserve holdings is closed within a year.

Subject: Balance of payments, Capital account, Capital inflows, Central banks, Current account, Exchange rate arrangements, Foreign exchange, Global financial crisis of 2008-2009, Reserves accumulation

Keywords: Capital account, Capital inflows, CCEPMG estimation, CCEPMG regression, Central banks, Coefficient estimate, Country group, Current account, East Asia, Emerging market economy, EMs estimation result, EMs subgroup, EMs subgroup sample, Exchange rate, Exchange rate arrangements, Financial crises, Financial crisis, Global, International reserves, Panel data estimation, Reserves accumulation, Reserves holding, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/047
Stock No:

WPIEA2018047
ISBN:

9781484345146
ISSN:

1018-5941

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