Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism

Enrique Mendoza, C. Bora Durdu and Marco Terrones

No 2007/146, IMF Working Papers from International Monetary Fund

Abstract: Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.

Keywords: WP; business cycle; debt limit; precautionary demand; globalization period; D. baseline result; business cycle volatility; Sudden Stop economy; effects of Volatility; Sudden stops; Foreign assets; Precautionary savings; Consumption; Global (search for similar items in EconPapers)
Pages: 54
Date: 2007-06-01
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Citations: View citations in EconPapers (42)

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Related works:
Journal Article: Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism (2009)
Working Paper: Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Mercantilism (2008)
Working Paper: Precautionary demand for foreign assets in sudden stop economies: an assessment of the new mercantilism (2007)
Working Paper: Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism (2007)
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