The International Reserves Glut: Is it for Real?

University of Florence Economics Working Paper No. 142

40 Pages Posted: 7 Feb 2006

See all articles by Giulio Cifarelli

Giulio Cifarelli

DISEI University of Florence

Giovanna Paladino

IntesaSanpaolo; LUISS Economics Department

Date Written: January 2006

Abstract

Monthly data from January 1985 to December 2004 are used to investigate reserves management in ten Asiatic and Latin American countries. Idiosyncratic explanatory variables enter cointegration relationships based on a stochastic buffer stock model, where a reserve variability measure is obtained via conditional variance approaches. International factors influence the cointegration residuals(representing the excess demands for reserves), which tend to co-move within and across geographical areas. Principal components analysis is implemented then to associate their common drivers with the US fed fund effective interest rate and real effective exchange rate. This two-step approach sheds light on some controversial aspects of reserves and exchange rate management in emerging markets such as "fear of floating" and mercantilist behavior. Our results suggest, contrary to common belief, that the size of recent excess reserves holdings is probably overstated.

Keywords: Emerging Markets' International Reserves, Cointegration Analysis, Principal Components Analysis.

JEL Classification: F310, F340, G150

Suggested Citation

Cifarelli, Giulio and Paladino, Giovanna, The International Reserves Glut: Is it for Real? (January 2006). University of Florence Economics Working Paper No. 142. Available at SSRN: https://ssrn.com/abstract=881050 or http://dx.doi.org/10.2139/ssrn.881050

Giulio Cifarelli

DISEI University of Florence ( email )

via delle Pandette 9
Florence 50127
Italy

Giovanna Paladino (Contact Author)

IntesaSanpaolo ( email )

Piazza San Carlo
Torino, 10121
Italy

LUISS Economics Department ( email )

Viale di Villa Massimo, 57
Rome, 00161
Italy

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