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Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis

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  • Patrick Carvalho
  • Renee A. Fry-McKibbin

Abstract

A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a byproduct of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil’s neighbouring countries, including on their foreign reserve build-ups.

Suggested Citation

  • Patrick Carvalho & Renee A. Fry-McKibbin, 2014. "Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis," CAMA Working Papers 2014-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2014-18
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-02/18_2014_carvalho_fry-mckibbin.pdf
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    References listed on IDEAS

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    Keywords

    Foreign exchange intervention; currency intervention; exchange rate volatility; reserve accumulation; factor model; emerging markets;
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