What Drove the Massive Hoarding of International Reserves in Emerging Economies? A Time-Varying Approach
Review of International Economics, Vol 20, Issue 1, 2012
28 Pages Posted: 21 Sep 2011 Last revised: 24 Jul 2012
Date Written: December 17, 2010
Abstract
Existing empirical models fail to explain the surge in the accumulation of foreign exchange reserves by emerging countries during the last decade. In this paper, we estimate the demand for international reserves on a panel of emerging countries using a Time-Varying Panel Smooth Transition Regression model (TV-PSTR) to relax the assumption of coefficient stability in the relationship. We find evidence that the parameters are not constant. In addition, we observe that the coefficients remained relatively stable until 2000 and then increased gradually and strongly thereafter. Our specification accounts for an acceleration that linear specifications fail to explain. Finally, we find that mercantilist motives are the major driver of this acceleration.
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