Abstract
This chapter surveys international reserve policies of East Asian central banks. It describes the massive accumulation of foreign exchange reserves since the financial crisis of 1997 and compares the behavior of East Asian countries to that of other emerging markets and the rest of the world. Based on a review of empirical panel data analyses, explanations for rising reserve levels are provided. In particular, mercantilist and precautionary motives, reactions to past financial crises and competitive considerations are discussed. The chapter then assesses the consequences of this reserve demand: Reserve hoarding entails costs and might interfere with domestic monetary policy. Finally, we examine how currency cooperation in East Asia might affect reserve policies. Potential forms of cooperation include bilateral swap agreements and reserve pooling. The Chiang Mai initiative, an illustrative example of reserve pooling, is presented and some ideas for potential improvements are pointed out.
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Notes
- 1.
In the literature, currency crises are often identified by an exchange market pressure index. The index combines changes in the nominal exchange rate, losses of reserves and increases in interest rates. A currency crisis is identified if the index exceeds a predefined threshold. According to this definition currency crises may occur independently of the prevailing exchange rate regime.
- 2.
Besides Asia, competitive hoarding is also present in Latin American countries (see Cheung and Sengupta 2010).
- 3.
Besides the multilateralised swap arrangements, there exist bilateral swap lines between China, Japan and South Korea.
- 4.
When the global financial crisis peaked, countries could only draw up on 20Â % of their maximum swap amount without IMF program. The IMF de-linked share was raised from 20 to 30Â % in 2012.
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Steiner, A. (2014). Reserve Policies of East Asian Central Banks: Causes, Consequences and Prospects. In: Rövekamp, F., Hilpert, H. (eds) Currency Cooperation in East Asia. Financial and Monetary Policy Studies, vol 38. Springer, Cham. https://doi.org/10.1007/978-3-319-03062-3_7
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