Accumulation of reserves in emerging and developing countries: mercantilism versus insurance

Motivated by the significant increases in international reserves during the 2000s, this paper analyzes the reasons why emerging and developing countries choose to accumulate them. In addition to a traditional measure of mercantilism, we add the terms of trade, and the speculation-deterrent motive. The results show that the mercantilist motive was a significant factor behind the massive accumulation of reserves before the global financial crisis, and it was almost as important as the precautionary motive. It is shown that commodity-exporting countries increased reserves for a fundamentally mercantilist motive. Finally, the speculation-deterrent motive was also an important factor during the 2000s.