Accounting for emerging market countries' international reserves: Are Pacific Rim countries different?

Abstract

Popular perception is that emerging market economies (EMEs), and Asian Pacific Rim countries—China, Indonesia, Korea, Malaysia, Philippines, Thailand, and Vietnam (RIMs)—in particular, have been rapidly accumulating reserves, perhaps beyond what is justified by precautionary motives. This paper compares and contrasts the determinants of the demand for international reserves in the RIM countries with other EMEs over the last three decades, based on current and capital account risks, mercantilism, and other motives. Our findings suggest that the motives for holding reserves has shifted from insurance against current account shocks (mostly in the 1980s) to insurance against capital account shocks (in the 1990s) and as the by-product of possible mercantilism (in the 2000s). We also find some differences between country groups: RIM countries tend to hold more reserves against current account vulnerabilities and fewer reserves against capital account vulnerabilities, but more reserves overall. There is also greater evidence of mercantilist motives being at play for RIM countries, though this motive accounts for only a small fraction of the rise in reserve holdings in recent years, peaking in 2004 and declining thereafter.