The Determinants of International Reserves in the Emerging Economies: A Non Linear Approach

Abstract

In this paper we adopt a non linear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a panel smooth transition model, that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a non linear behavior in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables - out of seven candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.