Shifting Motives: Explaining the Buildup in official Reserves in Emerging Markets Since the 1980's
IMF Working Papers, January 1, 2012
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Bibliographic details
- Authors: Atish R. Ghosh, Jonathan David Ostry, Charalambos G Tsangarides
- Published: January 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463933197.001
Core findings
- Vulnerability to current account shocks was relatively important in the 1980s.
- 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 become more important since the Asian crisis.
- Using quantile regressions, the reason for holding reserves varies according to a country's position in the global reserves distribution:
- High reserve holders tend to be more financially integrated.
- High reserve holders are motivated by insurance against capital account rather than current account shocks.
- High reserve holders are more sensitive to the cost of holding reserves than low-reserve holders.
- Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons at different points in the distribution.
Empirical approach and heterogeneity
- Methodology: quantile regressions to capture heterogeneity across the global reserves distribution.
- Heterogeneous motivations identified across quantiles:
- Low-reserve countries: stronger link to current account vulnerability historically.
- High-reserve countries: stronger link to precautionary motives against capital account shocks and greater sensitivity to reserve holding costs.
- Time variation:
- 1980s: current account shock vulnerability prominent.
- Post-Asian crisis: currency undervaluation and capital-account-related factors increasingly important.
Policy-relevant implications
- Macro policy and reserve management should account for a country's financial integration and position in the reserves distribution when assessing optimal reserve levels.
- Cost sensitivity among high-reserve holders suggests policy trade-offs between insurance benefits and fiscal/monetary costs of large reserve portfolios.
- Exchange rate policy and assessments of currency undervaluation matter for understanding and forecasting reserve accumulation across EMEs.
IMF Working Paper by Atish R. Ghosh, Jonathan David Ostry, and Charalambos G Tsangarides, January 1, 2012.