IMF Working Papers Volume 2007 Issue 146: Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism (2007)

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Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism

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Mr. Enrique G. Mendoza

Mr. Enrique G. Mendoza null

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Ceyhun Bora Durdu

Ceyhun Bora Durdu null

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Mr. Marco Terrones

Mr. Marco Terrones
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Series:: IMF Working Papers

Volume/Issue:: Volume 2007: Issue 146

Language:: English

Publication Date:: 01 Jun 2007

DOI:: https://doi.org/10.5089/9781451867107.001

ISBN:: 9781451867107

ISSN:: 1018-5941

Pages:: 54

Keywords:: WP; business cycle; debt limit; precautionary demand; globalization period; D. baseline result; business cycle volatility; Sudden Stop economy; effects of Volatility; Sudden stops; Foreign assets; Precautionary savings; Consumption; Global

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.

Series:: IMF Working Papers

Volume/Issue:: Volume 2007: Issue 146

Language:: English

Publication Date:: 01 Jun 2007

DOI:: https://doi.org/10.5089/9781451867107.001

ISBN:: 9781451867107

ISSN:: 1018-5941

Pages:: 54

Keywords:: WP; business cycle; debt limit; precautionary demand; globalization period; D. baseline result; business cycle volatility; Sudden Stop economy; effects of Volatility; Sudden stops; Foreign assets; Precautionary savings; Consumption; Global

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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Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.

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IMF Working Papers

ISSN:: 1018-5941

Publisher:: International Monetary Fund

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