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International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence
Author:
Mr. Joshua Aizenman null

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Mr. Jaewoo Lee
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Series:
IMF Working Papers
Volume/Issue:
Volume 2005: Issue 198
Language:
English
Publication Date:
01 Oct 2005
DOI:
https://doi.org/10.5089/9781451862171.001
ISBN:
9781451862171
ISSN:
1018-5941
Pages:
30
Keywords:
WP; precautionary demand
Legal-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.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund