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. © Springer Science+Business Media, LLC 2007.
CITATION STYLE
Aizenman, J., & Lee, J. (2007). International reserves: Precautionary versus mercantilist views, theory and evidence. Open Economies Review, 18(2), 191–214. https://doi.org/10.1007/s11079-007-9030-z
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