Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis
41 Pages Posted: 13 Feb 2014 Last revised: 26 Nov 2014
Date Written: February 1, 2014
Abstract
A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a by product of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil's neighbouring countries, including on their foreign reserve build-ups.
Keywords: Foreign exchange intervention, currency intervention, exchange rate volatility, reserve accumulation, factor model, emerging markets
JEL Classification: F31, F36, F41
Suggested Citation: Suggested Citation