The buffer stock model redux? An analysis of the dynamics of foreign reserve accumulation

Giulio Cifarelli () and Giovanna Paladino

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: Emerging market economies have recently accumulated large stocks of foreign reserves. In this paper we address the question of what are the main factors accounting for reserve holdings in nine developing countries located in Asia and Latin America. Monthly data from January 1985 to May 2006 are used to estimate for each country the long run equilibrium reserve demand, based on the buffer stock model, the short run dynamics governing the process of reserve accumulation (decumulation) and the factors which may influence the speed of adjustment of actual to desired reserves. Cointegration analysis suggests that the buffer stock precautionary model accounts for the optimal reserve demand. The corresponding VECMs are further interpolated, using the permanent and transitory innovations decomposition procedure of Gonzalo and Ng (2001), in order to assess the relative impact of the time series on the convergence to equilibrium after a shock. Finally the (asymmetric) effect on the speed of convergence of positive/negative changes in signal variables - such as the excess reserves of the previous period, relative competitiveness and US monetary stance - is found to be significant, in line with mercantilistic and fear of floating motives for hoarding international reserves.

Keywords: Emerging markets reserves; cointegration; P-T components decomposition; asymmetric adjustment (search for similar items in EconPapers)
JEL-codes: F32 F34 F36 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2007
New Economics Papers: this item is included in nep-mac and nep-sea
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Citations: View citations in EconPapers (1)

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Journal Article: The Buffer Stock Model Redux? An Analysis of the Dynamics of Foreign Reserve Accumulation (2009)
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