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Can High Reserves Offset Weak Fundamentals?

In: Exchange Rates, Currency Crisis and Monetary Cooperation in Asia

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  • Jie Li

Abstract

An important element of the ongoing global macroeconomic imbalances is the large and growing stockpile of international reserves by Asian economies. To be sure, between end 1990 and 2004 international reserves (excluding gold) in Asia rose from US$ 400 billion to US$ 2,600 billion (Figure 8.1; also see Chapters 1 and 9 of this volume).2 Part of the motivation for the reserve accumulation may derive from a deep-rooted mercantilist desire by Asian governments to maintain undervalued exchange rates and bolster domestic employment, as well as a general reluctance to forsake hard or soft US dollar pegged regimes (Cavoli and Rajan 2009, chapter 1).3 Apart from these exchange rate objectives, which have resulted in rapid reserve accumulation as a side effect, Asian countries have chosen explicitly to build up reserves for precautionary or insurance motives (Bird and Rajan 2003). For instance, Aizenman and Marion (2003) have noted that the “behavior has changed since the Asian financial crisis,” and go on to suggest that the “recent build-up of large international reserve holdings in a number of Asian emerging markets may represent precautionary holdings” (p. 11).

Suggested Citation

  • Jie Li, 2009. "Can High Reserves Offset Weak Fundamentals?," Palgrave Macmillan Books, in: Ramkishen S. Rajan (ed.), Exchange Rates, Currency Crisis and Monetary Cooperation in Asia, chapter 8, pages 180-189, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-0-230-23419-2_8
    DOI: 10.1057/9780230234192_8
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    Cited by:

    1. Qian, Xingwang & Steiner, Andreas, 2017. "International reserves and the maturity of external debt," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 399-418.
    2. Xingwang Qian & Andreas Steiner, 2014. "International Reserves and the Composition of Foreign Equity Investment," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 379-409, May.
    3. Steiner, Andreas, 2014. "Reserve accumulation and financial crises: From individual protection to systemic risk," European Economic Review, Elsevier, vol. 70(C), pages 126-144.

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