Open Economies Review

, Volume 18, Issue 2, pp 191–214 | Cite as

International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence

  • Joshua Aizenman
  • Jaewoo LeeEmail author
Research article


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.


International reserves Precautionary demand Mercantilist Financial crises 

JEL Classification

F15 F31 F43 



We thank Hali Edison for sharing the data, and Aleksandra Markovic for research assistance in the earlier phase of the project. We thank Michael Dooley, Ann Harrison, Linda Goldberg, Pierre-Olivier Gourinchas, Maury Obstfled, Brian Pinto, Ramkishen Rajan, Andy Rose, Partha Sen, George Tavlas, Tom Willett and participants in the SERC conference (Singapore 2005), Berkeley seminar, and the FRBSF conference for their useful comments. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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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

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