Financial Versus Monetary Mercantilism: Long-Run View of the Large International Reserves Hoarding

24 Pages Posted: 29 Dec 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: December 2006

Abstract

The sizable hoarding of international reserves by several East Asian countries has been frequently attributed to a modern version of monetary mercantilism - hoarding international reserves in order to improve competitiveness. From a long-run perspective, manufacturing exporters in East Asia adopted financial mercantilism - subsidizing the cost of capital - during decades of high growth. They switched to hoarding large international reserves when growth faltered, making it harder to disentangle the monetary mercantilism from a precautionary response to the heritage of past financial mercantilism. Monetary mercantilism also lowers the cost of hoarding through its short-term boost to external competitiveness, but may be associated with negative externalities leading to competitive hoarding.

Keywords: Mercantilism, cost of capital, competitive real depreciations, self insurance, precautionary hoarding

JEL Classification: F15, F31, F43

Suggested Citation

Aizenman, Joshua and Lee, Jaewoo, Financial Versus Monetary Mercantilism: Long-Run View of the Large International Reserves Hoarding (December 2006). IMF Working Paper No. 06/280. Available at SSRN: https://ssrn.com/abstract=954056

Joshua Aizenman

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jaewoo Lee (Contact Author)

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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