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Macroeconomic considerations in regional reserve pooling

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  • Leong Fee Wan
  • Yen Li Chee

Abstract

Traditional approach to optimal reserve determination centres on reserves as adjustments to shocks to the balance of payments. The demand for reserves varies according to the international interest rates, volatility of the terms of trade and the exchange rate regimes (Garcia, 1999). While precautionary motive (Aizenman and Lee, 2005; Li and Rajan, 2005) continues to dominate the changing motive of reserve accumulation in East Asia, the literature on optimal reserve allocation has shifted to the strategic issue of reserve pooling (Rajan and Siregar, 2002; Wan, 2005, 2006), to mobilize the vast pool of reserves exceeding the optimal level for regional investment in East Asia. Using cointegration analysis to determine the key macroeconomic variables such as import-reserve ratio, trade openness, short-term indebtedness, volatility of exports, net capital inflow as well as the interest rate spread between US Treasury rates and regional average lending rates, this article attempts to develop a regional framework for reserve currency pooling as liquidity support for the newly established ASEAN Plus Three (APT; China, Korea and Japan) in the Chiang Mai Initiative (CMI) in May 2000. The benefits and costs of reserve pooling are analysed, taking into consideration its welfare implications with and without including Australia as the potential member of APT in the distant future.

Suggested Citation

  • Leong Fee Wan & Yen Li Chee, 2009. "Macroeconomic considerations in regional reserve pooling," Applied Financial Economics, Taylor & Francis Journals, vol. 19(14), pages 1143-1157.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:14:p:1143-1157
    DOI: 10.1080/09603100802359950
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    References listed on IDEAS

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    1. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
    2. Li, Jie & Rajan, Ramkishen S., 2006. "Can High Reserves Offset Weak Fundamentals? A Simple Model of Precautionary Demand for Reserves," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 59(3), pages 317-328.
    3. Terada-Hagiwara, Akiko, 2005. "Foreign Exchange Reserves, Exchange Rate Regimes, and Monetary Policy: Issues in Asia," Asian Development Review, Asian Development Bank, vol. 22(2), pages 1-34.
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    Cited by:

    1. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.

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