Why Do Countries Accumulate International Reserves?

Abstract

International reserves were an important subject of the international finance literature in the 1960s and the 1970s, but interest dwindled with the collapse of the Bretton Woods system. The issue received renewed attention after the Asian Financial Crisis (AFC) in 1997 when developing and emerging market economies (EMEs) in Asia (and later the oil producers) started accumulating large stockpiles of reserves. This interest was further augmented by the global financial crisis (GFC) of 2008–2009 wherein some authors pointed to the fact that countries which held more reserves did better than those with lower levels of reserve holdings (Aizenman, 2009a; IMF, 2011). They suggested that the GFC led to a short period of reserve depletion toward the end of 2008 and early 2009, after which there has been a renewed acceleration in reserve accumulation in many of the EMEs.