International reserves accumulation and monetary policy autonomy: A nonlinear approach

Abstract

In this article, the relationship between international reserves and monetary autonomy in 21 emerging countries during the period 1999–2019 is investigated. Using a nonlinear panel analysis, we find that international reserves begin to have a positive effect on monetary autonomy when the ratio of international reserves to GDP is around 22%–23%. This result implies that the levels of international reserves are not necessarily excessive in most emerging countries and appear appropriate for supporting their monetary autonomy. Above this threshold, we also identify that the exchange rate regime and financial liberalization are no longer constraints for monetary autonomy. This result suggests a partial validity of the trilemma in emerging countries, with that validity depending on the level of international reserves.