International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence

32 Pages Posted: 3 Mar 2006

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Jaewoo Lee

International Monetary Fund (IMF) - Research Department

Date Written: October 2005

Abstract

This paper compares the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries. Overall, empirical results support precautionary motives; in particular, a more liberal capital account regime increases international reserves. Theoretically, large precautionary demand for international reserves arises as a self-insurance to avoid costly liquidation of long-term projects when the economy is susceptible to sudden stops. The welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.

Keywords: International Reserves, Precautionary Demand, mercantilist, financial crises

JEL Classification: F15, F31, F43

Suggested Citation

Aizenman, Joshua and Lee, Jaewoo, International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence (October 2005). IMF Working Paper, Vol. , pp. 1-32, 2005. Available at SSRN: https://ssrn.com/abstract=888067

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jaewoo Lee

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7331 (Phone)
202-623-6334 (Fax)

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