Mercantilism and China’s hunger for international reserves

Marcel Schroder

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: This paper is motivated by the popular view that the surge in China’s foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much "mercantilist" and "precautionary" motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China’s case. The results suggest that mercantilism accounts for less than 10 percent of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China’s international reserves.

Keywords: international reserves; precautionary demand; mercantilism; China (search for similar items in EconPapers)
JEL-codes: E58 F31 F36 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015
New Economics Papers: this item is included in nep-cna, nep-int, nep-mac, nep-mon, nep-opm and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:pas:papers:2015-04

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