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Shifting Motives: Explaining the Buildup in Official Reserves in Emerging Markets since the 1980s

Author/Editor: Ghosh, Atish R. | Ostry, Jonathan David | Tsangarides, Charalambos G.
Authorized for Distribution: January 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,617KB)
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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: 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.
 
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Series: Working Paper No. 12/34
Subject(s): Capital account | Current account | Economic models | Emerging markets | Exchange rate regimes | External shocks | Financial crisis | Reserves accumulation | Risk management
Author's keyword(s): International Reserves | Precautionary Demand | Mercantilism | Quantile Regression
 
English  
    Published:   January 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012034   Pages:   38
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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