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Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
Author: Mr. Enrique G. Mendoza, Ceyhun Bora Durdu, and Mr. Marco Terrones
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
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund