How Central Banks Prepare for Financial Crises - An Empirical Analysis of the Effects of Crises and Globalization on International Reserve Holdings
32 Pages Posted: 6 Aug 2009
Date Written: May 2009
Abstract
Central banks’ international reserve holdings have increased significantly in the recent past. While traditional models fail to explain this accumulation of reserves, the more recent literature argues that reserves are used as a lifejacket against currency crises. However, research so far has neglected the question whether and how central banks change their precautionary reserve holdings after the country was affected by a currency crisis.
This paper tests the hypothesis that central banks revise their reserve policy in the aftermath of currency crises. A dynamic panel data model is estimated for developing and industrial countries covering the period from 1975 to 2003. The evidence suggests that currency crises induce a permanent increase of reserves. This effect is particularly strong for recent currency crises since the Asian financial crisis of 1997-98.
Keywords: International Reserves, Currency Crises
JEL Classification: E58, F31
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Holding International Reserves in an Era of High Capital Mobility
-
International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence
By Joshua Aizenman and Jaewoo Lee
-
International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence
By Joshua Aizenman and Jaewoo Lee
-
Seigniorage and Political Instability
By Alex Cukierman, Sebastian Edwards, ...
-
International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence
By Joshua Aizenman and Jaewoo Lee
-
The High Demand for International Reserves in the Far East: What's Going on?
-
The High Demand for International Reserves in the Far East: What's Going on?
-
The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications
By Olivier Jeanne and Romain G. Rancière
-
The Social Cost of Foreign Exchange Reserves
By Dani Rodrik
-
The Social Cost of Foreign Exchange Reserves
By Dani Rodrik