Foreign reserve strategies for emerging economies - before and after the crisis

The global financial crisis posed as much of a challenge for the foreign exchange reserve policies of emerging countries as it did for their economic policies and financial systems. This pushed many countries into rethinking their strategies about foreign exchange reserves. This study presents the main objectives behind reserve accumulation by central banks, and summarises the considerations generally taken into account when defining the targeted level of foreign reserves. We also review the motives that led the majority of emerging countries to accumulate large-scale reserves in the period preceding the crisis. Many lessons can be drawn from the crisis about the level and use of reserves, and the possibilities for increasing reserves in times of turmoil. The lessons deemed most important by us, together with the foreign reserve trends of the post-crisis period are presented in the second part of this study. Based on our conclusions, international reserves are likely to increase further. This increase may generate further tensions in the global financial system, despite the fact that higher reserve levels may, on the level of individual countries, be a rational choice. To avoid global imbalances, international coordination and alternative sources of FX liquidity, such as central bank swap lines, new IMF instruments and regional financial solutions - vital in times of crisis - should be reinforced.