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

32 Pages Posted: 3 Mar 2006

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

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 No. 05/198, Available at SSRN: https://ssrn.com/abstract=888067

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
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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