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

56 Pages Posted: 23 Aug 2007

See all articles by Ceyhun Bora Durdu

Ceyhun Bora Durdu

Federal Reserve Board

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Marco E. Terrones

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

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: Working Paper, Reserves accumulation, Crisis prevention, Financial crisis, Deflation, Deflation, Dollarization, Globalization, Business cycles, Credit, Economic models

Suggested Citation

Durdu, Ceyhun Bora and Mendoza, Enrique G. and Terrones, Marco E., Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism (June 2007). IMF Working Papers, Vol. , pp. 1-54, 2007. Available at SSRN: https://ssrn.com/abstract=1007895

Ceyhun Bora Durdu (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523775 (Phone)

HOME PAGE: http://www.ceyhunbora.com

Enrique G. Mendoza

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Marco E. Terrones

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

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