The Review of International Organizations

, Volume 6, Issue 3–4, pp 393–413 | Cite as

Reserves, quotas and the demand for international liquidity



The foreign exchange reserves held by emerging market economies rose significantly in the last decade. This increase has been attributed to a desire by these countries to self-insure themselves against financial shocks. The rise in reserves may also reflect their concerns about the size of their IMF quotas, which set limits on the amount of credit that countries could draw from the IMF, and the conditionality associated with borrowing from the IMF. We offer a model of the choice by central banks between quotas and reserves to demonstrate that emerging markets will choose to hold relatively more reserves than advanced economies. We then investigate the impact of IMF quotas on reserve holdings for a panel of countries during the period of 1980–2006. In addition to finding evidence of precautionary and mercantilist motives for holding reserves in emerging markets, we also find that reserves in these countries have been inversely related to their IMF quotas.


Foreign reserves IMF 

Supplementary material (13 kb)
(DO File 13.1 KB)
11558_2011_9104_MOESM2_ESM.dta (112 kb)
(DTA File 112 KB)


  1. Aizenman, J., & Lee, J. (2007). International reserves: Precautionary versus mercantilist views, theory and evidence. Open Economies Review, 18(2), 191–214.CrossRefGoogle Scholar
  2. Aizenman, J., & Marion, N. (2003). The high demand for international reserves in the far east: What is going on? Journal of the Japanese and International Economies, 17(3), 370–400.CrossRefGoogle Scholar
  3. Aizenman, J., & Pasricha, G. K. (2010). Selective swap arrangements and the global financial crisis: Analysis and interpretation. International Review of Economics and Finance, 19(3), 353–365.CrossRefGoogle Scholar
  4. Aizenman, J., & Sun Y. (2009). The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’? NBER Working Papers No., National Bureau of Economic Research, Inc.Google Scholar
  5. Astley, M., Giese, J., Hume, M., & Kubelec, C. (2009). Global imbalances and the financial crisis. Bank of England Quarterly Review, 49(3), 178–190.Google Scholar
  6. Baumol, W. (1952). The transactions demand for cash: An inventory theoretic approach. Quarterly Journal of Economics, 66(4):121–148CrossRefGoogle Scholar
  7. Bergsten, C. (2007). How to solve the problem of the dollar. Financial Times December 11.Google Scholar
  8. Bird, G., & Mandilaras, A. (2010). Revisiting Mrs. Machlup’s wardrobe: The accumulation of international reserves, 1992–2001. Applied Economics Letters, 17(5), 467–471.CrossRefGoogle Scholar
  9. Bird, G., & Mandilaras, A. (2011). Once bitten: The effect of IMF programs on subsequent reserve behavior. Review of Development Economics (forthcoming).Google Scholar
  10. Bird, G., & Rajan, R. (2003). Too much of a good thing? Reserves in the aftermath of crises. World Economy, 26(6), 873–891.CrossRefGoogle Scholar
  11. Bird, G., & Rowlands, D. (2006). Imf quotas: Constructing an international organization using inferior building blocks. The Review of International Organizations, 1(2), 153–171.CrossRefGoogle Scholar
  12. Bird, G., Hussain, M., & Joyce, J. P. (2004). Many happy returns? Recidivism and the imf. Journal of International Money and Finance, 23(2), 231–251.CrossRefGoogle Scholar
  13. Black, S. W. (1985). International money and international monetary arrangements. In: R. W. Jones, & P. B. Kenen (Eds.), Handbook of international economics (Vol. 2, pp. 1153–1193, Chap. 22). Amsterdam and New York: Elsevier.Google Scholar
  14. Cheung, Y. W., & Ito, H. (2009). A cross-country empirical analysis of international reserves. International Economic Journal, 23(4), 447–481.CrossRefGoogle Scholar
  15. Chinn, M., & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10(3), 309–322.CrossRefGoogle Scholar
  16. Choi, W. G., Sharma, S., & Strömqvist, M. (2009). Net capital flows, financial integration, and international reserve holdings: The recent experience of emerging markets and advanced economies. IMF Staff Papers, 56(3), 516–540.CrossRefGoogle Scholar
  17. Desai, R., & Vreeland, J. (2011). Global governance in a multipolar world: The case for regional monetary funds. International Studies Review, 13(1), 109–121.CrossRefGoogle Scholar
  18. Dooley, M. P., Folkerts-Landau, D., & Garber, P. (2003). An essay on the revived bretton woods system. NBER Working Paper 5756.Google Scholar
  19. Durdu, C. B., Mendoza, E. G., & Terrones, M. E. (2009). Precautionary demand for foreign assets in sudden stop economies: An assessment of the new mercantilism. Journal of Development Economics, 89(2), 194–209.CrossRefGoogle Scholar
  20. Eichengreen, B. (2010a). The financial crisis and global policy reforms. In: R. Glick, & M. Spiegel (Eds.), Asia and the global financial crisis (pp. 299–334). San Francisco: Federal Reserve Bank of San Francisco.Google Scholar
  21. Eichengreen, B. (2010b). Out-of-the-box thoughts about the international financial architecture. Journal of International Commerce, Economics and Policy (JICEP), 1(01), 1–20.CrossRefGoogle Scholar
  22. European Central Bank (2010). Prospects for real and financial imbalances and a global rebalancing. ECB Monthly Bulletin April:91–100.Google Scholar
  23. Heller, R. H. (1966). Optimal international reserves. Economic Journal, 76(302), 296–311.CrossRefGoogle Scholar
  24. International Monetary Fund (2003) World economic outlook. Washington, D.C.: IMF.Google Scholar
  25. International Monetary Fund (2010) The Fund’s mandate-future financing role. Tech. Rep., Washington, D.C.: IMF,
  26. Jeanne, O. (2007). International reserves in emerging market countries: Too much of a good thing? Brookings Papers on Economic Activity, (1), 1–55.Google Scholar
  27. Jeanne, O. (2010). International financial safety nets and global imbalances. In: S. Claesses, S. Evenett, & B. Hoekman (Eds.), Rebalancing the global economy: A primer for policymaking (pp. 191–194). London: Centre for Economic Policy Research.Google Scholar
  28. Joyce, J., & Sandler, T. (2008). IMF retrospective and prospective: A public goods viewpoint. Review of International Organizations, 3(3), 221–238.CrossRefGoogle Scholar
  29. Kenen, P. B.(2010). Renovation of the global reserve regime: Concepts and proposals. Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies.Google Scholar
  30. Lane, P. R., & Burke, D. (2001). The empirics of foreign reserves. Open Economies Review, 12(4):423–434.CrossRefGoogle Scholar
  31. Mateos y Lago, I., Duttagupta, R., & Goyal, R. (2009). The debate on the international monetary system. IMF staff position note no. 09/26, Washington, DC: International Monetary Fund.Google Scholar
  32. Mendoza, R. U. (2004). International reserve-holding in the developing world: Self insurance in a crisis-prone era? European Economic Review, 5(1), 61–82.Google Scholar
  33. Moessner, R., & Allen, W. A. (2010). Options for meeting the demand for international liquidity during financial crises. BIS Quarterly Review, September, 51–60.Google Scholar
  34. Moser, C., & Sturm, J.-E. (2011). Explaining IMF lending decisions after the cold war. Review of International Organizations. doi:10.1007/s11558-011-9106-9.
  35. Obstfeld, M., & Rogoff, K. (2010). Global imbalances and the financial crisis: Products of common causes. In: R. Glick, & M. Spiegel (Eds.), Asia and the global financial crisis (pp. 131–172). San Francisco: Federal Reserve Bank of San Francisco.Google Scholar
  36. Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2009). Financial instability, reserves, and central bank swap lines in the panic of 2008. American Economic Review, 99(2), 480–86.CrossRefGoogle Scholar
  37. Obstfeld, M., Shambaugh J. C., & Taylor, A. M. (2010). Financial stability, the trilemma, and international reserves. American Economic Journal: Macroeconomics, 2(2), 57–94.CrossRefGoogle Scholar
  38. Rapkin, D. P., & Strand, J. R. (2006). Reforming the IMF’s weighted voting system. World Economy, 29(3), 305–324.CrossRefGoogle Scholar
  39. Reinhart, C., & Rogoff, K. (2004). The modern history of exchange rate arrangements: A reinterpretation. Quarterly Journal of Economics, 119(1), 1–48.CrossRefGoogle Scholar
  40. Sussangkarn, C. (2010). The Chiang Mai initiative multilateralization: Origin, development and outlook. ADBI Working Papers no. 230, Asian Development Bank Institute.Google Scholar
  41. Zhou, X. (2009). Reform the international monetary system. Available at

Copyright information

© Springer Science + Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of EconomicsWellesley CollegeWellesleyUSA
  2. 2.Department of EconomicsCarleton UniversityOttawaCanada

Personalised recommendations