Out-of-Sample Analysis of International Reserves for Emerging Economies with a Dynamic Panel Model

Abstract

Using data on 70 emerging countries for 1990-2011, we re-examine the validity of both traditional and recently proposed determinants of international reserves. The dynamic panel model considers panel unit root, endogeneity, and country heterogeneity and reveals that not only traditional determinants but also new financial variables — M2/GDP and foreign capital inflows through over-the-counter markets — have significant effects on reserves hoarding. More importantly, out-of-sample forecasts show that the dynamic model yields the best goodness-of-fit, and its predicted values successfully account for the recent patterns in reserve accumulations.

Keywords: foreign exchange reserves, dynamic panel estimation, out-of-sample analysis, emerging economies, over-the-counter markets

JEL Classification: C23, E44, E58, F21, F31