What Drove the Massive Hoarding of International Reserves in Emerging Economies? A Time-Varying Approach

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.