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The Financial Crisis and Sizable International Reserves Depletion: From 'Fear of Floating' to the 'Fear of Losing International Reserves'?

Joshua Aizenman () and Yi Sun
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Yi Sun: University of California at Santa Cruz

No 382009, Working Papers from Hong Kong Institute for Monetary Research

Abstract: In this paper we study the degree to which emerging markets (EMs) adjusted to the global liquidity crisis by drawing down their international reserves (IR). Overall, we find a mixed and complex picture. Intriguingly, only about half of the EMs depleted their IR as part of the adjustment mechanism. To gain further insight, we compare the pre-crisis demand for IR of countries that experienced sizable IR depletion, to that of countries that did not, and find different patterns between the two groups. Trade related factors (such as trade openness, primary goods export ratio, especially large oil export) seem to play a significant role in accounting for the pre-crisis IR/GDP level of countries that experienced a sizable IR depletion during the first phase of the crisis. Our findings suggest that countries that internalized their large exposure to trade shocks before the crisis, used their IR as a buffer stock in the first phase of the crisis. Their reserves losses followed an inverted logistical curve. After a rapid initial depletion of reserves, within seven months they reached a markedly declining rate of IR depletion, losing not more than one-third of their pre-crisis IR. On the contrary, in the case of countries that refrained from a sizable IR depletion during the first phase of the crisis, financial factors seem more important than trade factors in explaining the initial IR/GDP level. Our results indicate that the adjustment of EMs was constrained more by their fear of losing IR than by their fear of floating.

Keywords: Trade Shocks; Deleveraging; International Reserves; Emerging Markets (search for similar items in EconPapers)
JEL-codes: F15 F21 F32 F43 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-12
New Economics Papers: this item is included in nep-cba and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’? (2012) Downloads
Working Paper: The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’? (2009) Downloads
Working Paper: The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'? (2009) Downloads
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