Are Developing Asia’s Foreign Exchange Reserves Excessive? An Empirical Examination

26 Pages Posted: 28 May 2010

See all articles by Donghyun Park

Donghyun Park

Asian Development Bank - Economic Research

Gemma Bolotaulo Estrada

Asian Development Bank - Economic Research

Date Written: August 1, 2009

Abstract

Developing Asian countries have accumulated foreign exchange reserves on an unprecedented scale in recent years. There is a growing consensus that Asia’s reserves now substantially exceed the levels required for precautionary purposes or for self-protection against currency crisis. The central objective of our paper is to informally and formally test whether reserves in developing Asia have in fact reached excessive levels. Informal tests of reserve adequacy based on widely used rules of thumb such as the Greenspan-Guidotti rule unambiguously indicate the presence of sizable excess reserves. To test for excess reserves more formally, we use panel-data econometric analysis based on Edison (2003). Our estimation results indicate the presence of large and growing excess reserves since 2002. The results of both informal and formal tests thus confirm the popular belief that developing Asia now has excessive foreign exchange reserves. Therefore, the short-run policy challenge for Asian governments is to manage the region’s burgeoning excess reserves more actively and use them more productively. One promising area of future research, brought to the fore by the global financial crisis, is to develop more nuanced measures of reserve adequacy that take into account the possibility of severe negative shocks.

Keywords: Foreign exchange reserve, Asia

JEL Classification: F31

Suggested Citation

Park, Donghyun and Estrada, Gemma Bolotaulo, Are Developing Asia’s Foreign Exchange Reserves Excessive? An Empirical Examination (August 1, 2009). Asian Development Bank Economics Working Paper Series No. 170, Available at SSRN: https://ssrn.com/abstract=1616950 or http://dx.doi.org/10.2139/ssrn.1616950

Donghyun Park (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Gemma Bolotaulo Estrada

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
224
Abstract Views
1,196
rank
149,329
PlumX Metrics