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

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  • Mr. Joshua Aizenman
  • Mr. Jaewoo Lee

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.

Suggested Citation

  • Mr. Joshua Aizenman & Mr. Jaewoo Lee, 2005. "International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence," IMF Working Papers 2005/198, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2005/198
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    References listed on IDEAS

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    WP; precautionary demand;

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