Effects of foreign reserve stock in Asian countries

Abstract

Large accumulations of foreign reserves have been ongoing recently in Asian countries. Policymakers seem to have decided to increase high levels of foreign reserves for self-insurance or precautionary purposes against exchange rate movements. Other countries have accumulated foreign reserves to achieve macroeconomic stability. This paper analyses the recent extent of sterilisation in the foreign exchange markets and the degree of capital mobility in Asian countries. Although capital mobility surged, the de facto degree declined after the crisis with evidence of sterilisation of foreign reserve accumulations. However, past reserve accumulation has not been a major source of excessive liquidity creation and could indicate worry is uncertain in Asian economies.