Accumulation Of International Reserves Research Articles

Financial Dollarization in Russia: Causes and Consequences

We review some aspects of financial dollarization in Russia, applying the main relevant theories to analyze the dynamics of several dollarization indicators. An econometric model of the short run dynamics of deposit and loan dollarization is estimated for the last decade. We find that ruble appreciation was the main driver of the de-dollarization that occurred then and of the later episode of renewed dollarization. We estimate the overall (and sectoral) currency mismatches of the Russian economy. The results show a gradual improvement of the net foreign currency position of the public sector, where we have seen significant accumulation of international reserves by the Bank of Russia and repayment of government debt. Evidence is also presented for the significant currency risk vulnerability of the non-banking private sector. Several existing empirical studies are examined in order to assess the growth losses of the Russian economy following the crisis of 2008, which was linked with the financial dollarization.

Regime dependence, Mrs. Machlup's wardrobe and the accumulation of international reserves in Asia

An old yet rarely explored motive of hoarding international reserves advanced by Machlup (1966) is examined. Reserve accumulation behavior in Asia is driven by a psychological desire to keep up with neighboring countries, i.e., ‘keeping up with the Joneses effect’.

Time for a visible hand: lessons from the 2008 world financial crisis

1. Introduction PART I: THE CRISIS IN THE UNITED STATES 2. The Financial Crisis of 2007-2008 and its Macroeconomic Consequences 3. Subprime Finance: Yes, We are Still in Kansas 4. Background Considerations to a Re-regulation of the U.S. Financial System: Third time a Charm? Or Strike Three? 5. Responding to the Crisis PART II: REFORMING FINANCIAL REGULATION 6. Central Banks, Liquidity and the Banking Crisis 7. Agenda and Criteria for Financial Regulatory Reform 8. The Role of Policy and Banking Supervision in the Light of the Credit Crisis 9. How, If at All, should Credit Rating Agencies (CRAs) be Regulated? 10. Credit Default Swaps (CDSs): The Keys to Financial Reform 11. Governing the Regulatory System PART III: DEVELOPING COUNTRY PERSPECTIVES 12. The Management of Capital Flows and Financial Vulnerability in Asia 13. Regulation of Financial Sector in Developing Countries: Lessons from the 2008 Financial Crisis 14. Economic Development and the International Financial System 15. The Accumulation of International Reserves as a Defense Strategy PART IV: REFORMING THE GLOBAL MONETARY SYSTEM 16. Reforming the Global Reserve System 17. A Modest Proposal for International Monetary Reform

Revisiting Mrs. Machlup's wardrobe: the accumulation of international reserves, 1992–2001

A fature of the late 1990s was the accumulation of International reserves in many countries. Against the background of this phenomenon, in what follows we investigate the following questions: how widely has the tendency to accumulate reserves been seen? Does the incidence of a currency crisis increase the subsequent demand for reserves? Do countries make choices between different combinations of exchange rate regime and reserve holding? Does an arrangement with the IMF encourage countries subsequently to build up reserves more than they otherwise would have done? Do different patterns emerge depending upon the measure of reserves used? In addressing the above questions, we find significant support for the ‘Mrs. Machlup’s Wardrobe Theory' of international reserves, which purports that irrespective of the amount of reserves countries have accumulated, they continue to add to their stock.

International Reserves and Underdeveloped Capital Markets

International reserve accumulation by developing countries is just one example of the puzzling behavior of international capital flows. Capital should flow to where its return is highest, which ought to be where capital is scare. Yet recent data suggest the opposite Ð net capital flows from developing countries to industrialized countries. This paper examines the role of financial market development in the accumulation of international reserves. In countries with underdeveloped capital markets the governmentOs accumulation of reserves may substitute for what would otherwise be private sector capital outflows. Effectively, these governments are acting as financial intermediaries, channeling domestic savings away from local uses and into international capital markets, thereby offsetting the effects of domestic financial constraints that lead to excessive private sector exposure to potential capital shortfalls. (This abstract was borrowed from another version of this item.)

A Macroeconomic Perspective on Reserve Accumulation

AbstractThis paper nests the buffer stock model within a standard open‐economy model to capture two motives for international reserves accumulation—the insurance motive and the export‐led growth motive. The model is solved for two exchange‐rate policies, discretion and a rule with escape clause. It illustrates the behavior of international reserves and other macroeconomic variables when the policymaker pursues output and inflation stabilization and recognizes the supply of reserves can constrain the choice of exchange rate and the choice of exchange rate affects the supply of reserves. When output is below potential, it is optimal under both discretion and the rule to adopt a weak currency and promote export‐led growth to achieve output and inflation stabilization. This policy leads to reserve accumulation and is consistent with the behavior of China. When reserves are low initially, welfare is higher when the policymaker follows a rule.

The new exchange rate policy in the Asian emerging economies – goodbye trouble, hello comfort?

In this paper, we discuss new aspects of exchange rate policy that can be observed in the Asian emerging economies. In the first place, we show the alternative regimes they may choose and their respective pros and cons. Secondly, we concentrate on the recent strategy of systematic undervaluation of one's currency – figuring prominently among ‘big’ Asian players such as China and India – and the most likely implications of such a strategy for domestic allocation, distribution and stabilization goals. With the background of Germany's experiences in 1969, almost on the eve of the Bretton Woods' system collapse, we model a speculative attack on an undervalued currency in the vein of the Flood–Garber seminal paper from 1984. Now, however, the country in concern (just like India and China) possesses strong rather than weak fundamentals. The continuous accumulation of international reserves, in addition, leads to the question of an ‘optimal management’ of foreign exchange reserves in Asian emerging economies with regard to size and composition. We finally propose a sequence of reforms/policies that should be implemented in those Asian emerging economies on their still long journey to a regime featured by autonomous monetary policy, flexible exchange rate and capital mobility. A brief summary and an outlook for future research close the paper.

Capital Flows to Developing Countries: The Allocation Puzzle

The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more. We call this puzzle the allocation Using a wedge analysis, we find that the pattern of capital flows is driven by national saving: the puzzle is a saving puzzle. Further disaggregation of capital flows reveals that the puzzle is also related to the pattern of accumulation of international reserves. The solution to the allocation puzzle, thus, lies at the nexus between growth, saving and international reserve accumulation. We conclude with a discussion of some possible avenues for research.

Bolivia

The hydrocarbons sector has become one of the most dynamic economic activities in the Bolivian economy and the main driver of improved export performance and international reserve accumulation. The central role of the hydrocarbons sector in the economy is attributable to the high levels of investment made in the late 1990s, which permitted much higher production levels, particularly of natural gas. However those positive developments in the hydrocarbons sector have given rise to the possibility of a new case of disease. While Bolivia's economy has already seen many benefits from its higher gas exports, especially in terms of lower external vulnerability and improved fiscal stance, the new resources could also limit the development of other economic sectors in terms of output and factor income. This paper explores the transmission channels of Dutch disease, as well as its main symptom, the appreciation of the real exchange rate

Is the accumulation of international reserves good for development?

International reserves accumulation has been the preferred policy recently adopted by developing economies to achieve financial stability. The aim of this policy is to increase liquidity and thus reduce the risk of suffering a speculative attack. The main concern expressed in the literature has been related to its cost. Most of the studies conclude that the opportunity cost of international reserves accumulation is around 1% of GDP. However, these studies have not analysed whether this strategy is, or could be, more broadly supportive of development, an issue that must be of central interest for developing economies. The aim of this paper is to show that the stockpiling of international reserves is not optimal for developmental purposes and that there exist alternative policies that can be applied to achieve financial stability, policy autonomy and a better performance in terms of development.

Bolivia: The Hydrocarbons Boom and the Risk of Dutch Disease

The hydrocarbons sector has become one of the most dynamic economic activities in the Bolivian economy and the main driver of improved export performance and international reserve accumulation. The central role of the hydrocarbons sector in the economy is attributable to the high levels of investment made in the late 1990s, which permitted much higher production levels, particularly of natural gas. However those positive developments in the hydrocarbons sector have given rise to the possibility of a new case of disease. While Bolivia's economy has already seen many benefits from its higher gas exports, especially in terms of lower external vulnerability and improved fiscal stance, the new resources could also limit the development of other economic sectors in terms of output and factor income. This paper explores the transmission channels of Dutch disease, as well as its main symptom, the appreciation of the real exchange rate

Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?

The accumulation of international reserves by emerging markets raises the question of how to best utilize these funds. This paper explores two routes through which the pooling of reserves could enhance stability and welfare. First, the reserve pool could be used for emergency lending in response to sudden stops. Second, a portion of the reserve pool along with borrowed funds could be used to purchase contingent debt securities issued by governments and corporations, helping to solve the first-mover problem that limits the liquidity of markets in these instruments and hinders their acceptance by private investors. This paper argues that the second option is more likely to be feasible and productive.

Hot money inflows and monetary stability in China: how the People's Bank of China took up the challenge

Nonforeign direct investment capital inflows in China were particularly strong in 2003 and 2004. They have led to a rapid accumulation of international reserves and they may have provided excess liquidity to the Chinese economy. This article, investigates how the central bank of China managed the rapid build-up of international reserves in 2003 and 2004. The relationship between real international reserves and real domestic credit is examined with a Vector Error Correction Model, estimated on monthly data from January 1997 to March 2006. Empirical results show that this relationship was negative, which suggests that the central bank succeeded in slowing down real domestic credit when real international reserves increased. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China proceeded to control domestic credit.

Hot Money Inflows and Monetary Stability in China: How the People's Bank of China Took Up the Challenge

Non-foreign direct investment capital inflows in China were particularly strong in 2003 and 2004. They have led to a rapid accumulation of international reserves and they may have provided excess liquidity to the Chinese economy. This paper investigates how the central bank of China managed the rapid build-up of international reserves in 2003 and 2004. The relationship between real international reserves and real domestic credit is examined with a Vector Error Correction Model (VECM), estimated on monthly data from January 1997 to March 2006. Empirical results show that this relationship was negative, which suggests that the central bank succeeded in slowing down real domestic credit when real international reserves increased. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China (PBC) proceeded to control domestic credit.

Asymmetric exchange rate intervention and international reserve accumulation in India

The empirical evidence derived from the ARDL approach of Pesaran et al. [Pesaran, M.H., Shin, Y., Smith, R.J., 1996. Testing for the existence of a long-run relationship, DAE Working Paper No. 9622, Department of Applied Economics, University of Cambridge] suggests that volatility of external transactions has had a moderate impact on reserve demand in recent years. Instead, asymmetric exchange rate intervention triggered, perhaps, by concerns about India's export competitiveness seems to have contributed to large stockpile of reserves.

International Recycling Channels of Petrodollars

The continued rise in oil prices since 2002 has resulted in a significant increase in export revenue for oil exporting countries. This increase in the price of oil and other commodities means that OPEC countries and Russia have received, between 2003 and 2006, a windfall of 1.3 trillion dollars with respect to their export level in 2002. This paper analyzes, using the limited data available, the recycling of these resources back to the world economy through the trade channel, via higher imports, or the financial channel, via an increase in the net external asset position of these countries. Our results show that around 50% of the windfall revenue has been used to increase imports, while the rest has been directed towards international reserve accumulation and other improvements in the net asset position of these countries. Comparing the current oil price increase with previous ones, such as those resulting from the tightening of oil supply in the 70's, we find that the trade channel has been more important in the current episode than in previous ones. This can be attributed to (i) the perception of a more permanent increase in the price of oil in the context of rising demand, and (ii) the gradualism of the current oil price increase, which has allowed a stronger response from imports.

The resolution of global imbalances: Soft landing in the North, sudden stop in emerging markets?

The paper shows that the increase in the US current account deficit since 1997 was financed by Emerging Market economies, EMs. Since 2001 a large share of the funding was carried out by the official sector, taking mostly the form of accumulation of international reserves. The paper argues that (1) if official funding is stopped or reversed, the private sector in EMs is likely to provide offsetting funds, preventing the US to go through a Sudden Stop episode; and (2) in the unlikely event that global saving collapses, the brunt of the adjustment is likely to be borne by EMs, e.g., through Sudden Stops, and flight to quality likely to ensure the US a smooth transition, i.e., a soft landing.

Spending Seigniorage: Do Central Banks Have a Governance Problem?

This paper reviews how central banks allocate seigniorage, based on systematic crosscountry comparisons of their financial accounts. Central banks are classified as weak or strong, depending upon their structural profitability. Weak central banks typically (although not exclusively) operate in smaller and less wealthy countries, lack independence from their governments, and are burdened by compulsory transfers and low capital. Their operating expenditures, nonperforming assets, international reserve carrying costs, and international reserve accumulation needs are high. Governance appears to be a potential concern in many central banks, both weak and strong, with operating expenditures often adjusting upward for high profitability and capital accumulation adjusting downward for low profitability. The main policy implications are briefly reviewed.

Spending Seigniorage: Do Central Banks Have a Governance Problem?

This paper reviews how central banks allocate seigniorage, based on systematic crosscountry comparisons of their financial accounts. Central banks are classified as weak or strong, depending upon their structural profitability. Weak central banks typically (although not exclusively) operate in smaller and less wealthy countries, lack independence from their governments, and are burdened by compulsory transfers and low capital. Their operating expenditures, nonperforming assets, international reserve carrying costs, and international reserve accumulation needs are high. Governance appears to be a potential concern in many central banks, both weak and strong, with operating expenditures often adjusting upward for high profitability and capital accumulation adjusting downward for low profitability. The main policy implications are briefly reviewed.

Macroeconomic Policies and Performance in Iran

This paper reviews Iran's macroeconomic policies and performances during the last 3 decades, starting with the macroeconomic situation before the Islamic Revolution in 1979. Iran emerged from the 8-year war with Iraq in 1988 with a highly centralized economy. Iran then initiated an ambitious reconstruction program of three Five-Year Economic, Social, and Cultural Development Plans (FYDPs). The Third FYDP was a growth-oriented macroeconomic management program that led to the rapid growth of the non-oil sector, a decline in the unemployment rate, a reduction in external debt, accumulation of official international foreign reserves, and improvements in key social indicators. The key challenges facing Iran's economy are highlighted and some distinctive features of the Fourth FYDP (for 2005–2009) are summarized.