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International Reserves: Precautionary vs. Mercantilist Views, Theory, and Evidence

Author/Editor: Aizenman, Joshua | Lee, Jaewoo
Authorized for Distribution: October 1, 2005
Electronic Access: Free Full Text (PDF file size is 227KB)
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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: This paper compares the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries. Overall, empirical results support precautionary motives; in particular, a more liberal capital account regime increases international reserves. Theoretically, large precautionary demand for international reserves arises as a self-insurance to avoid costly liquidation of long-term projects when the economy is susceptible to sudden stops. The welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.
 
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Series: Working Paper No. 05/198
Subject(s): Foreign exchange reserves | Financial crisis | Demand | Capital account | Economic models
Author's keyword(s): International reserves | precautionary demand | mercantilist | financial crises
 
English  
    Published:   October 1, 2005        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2005198   Pages:   32
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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