The Size of Foreign Exchange Reserves
23 Pages Posted: 13 Dec 2019
Date Written: October 31, 2019
This paper assesses the determinants of foreign exchange (FX) reserves in emerging market economies (EMEs). First, it reviews the drivers behind reserve accumulation and the metrics used to evaluate reserve adequacy. We argue that precautionary motives, at least until early 2000s, were the main drivers of reserves accumulation for most of the countries. However, more recently, goals related to monetary and exchange rate policies also play significant roles. Next, the paper evaluates the costs of holding reserves, both at the domestic and global levels. In particular, we highlight the low rate of return on reserves assets and valuation risks that EMEs face. We also discuss the possible role of higher reserves in reducing US long term interest rates. Finally, the paper discusses some supportive and alternative policies such as macroprudential policies and swap agreements, which could alleviate reliance on reserve accumulation.
Full Publication: Reserve Management and FX Intervention
Keywords: Foreign exchange reserves, reserve adequacy, precautionary demand, export competitiveness
JEL Classification: F3, F31, F36, F41
Suggested Citation: Suggested Citation