Open Economies Review

, Volume 18, Issue 2, pp 191–214

International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence

Research article

DOI: 10.1007/s11079-007-9030-z

Cite this article as:
Aizenman, J. & Lee, J. Open Econ Rev (2007) 18: 191. doi:10.1007/s11079-007-9030-z
  • 1.3k Downloads

Abstract

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.

Keywords

International reservesPrecautionary demandMercantilistFinancial crises

JEL Classification

F15F31F43

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Economics Department and the NBERUniversity of CaliforniaSanta CruzUSA
  2. 2.Research DepartmentInternational Monetary FundWashingtonUSA