International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence

Joshua Aizenman and Jaewoo Lee

Open Economies Review, 2007, vol. 18, issue 2, 214 pages

Abstract: 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. Copyright Springer Science+Business Media, LLC 2007

Keywords: International reserves; Precautionary demand; Mercantilist; Financial crises; F15; F31; F43 (search for similar items in EconPapers)
Date: 2007
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Journal Article: International reserves: precautionary versus mercantilist views, theory and evidence (2005)
Working Paper: International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence (2005)
Working Paper: International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence (2005)
Working Paper: International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence (2005)
Working Paper: International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence (2005)
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DOI: 10.1007/s11079-007-9030-z

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