Reserve Pooling Research Articles

Asymmetric stabilizing impact of international reserves

ABSTRACTThis article studies international reserves’ nominal exchange rate stabilizing impact in emerging markets and developing countries, with a particular focus on its nonlinearity and asymmetry across different states of the economy. Using the fixed-effects and dynamic panel threshold models, we find the reserves to short-term debt threshold ratio after which the marginal stabilizing effect of reserves begins to fall during tranquil times. Such diminishing returns, however, do not appear to exist even at the excessive level of reserves during the global financial crisis, partly justifying precautionary demand for international reserves. These results call for extending reserve pooling or swap arrangements to enhance efficiency of reserve management by holding adequate, rather than excess, international reserves with an access to emergency lending during the crisis.

Insuring against Neighboring Crises : International Reserves in Latin America

This paper revisits the traditional literature on optimal demand for international reserves by exploring the possibility that perceived contagion risk originating from neighboring countries influences a country’s own demand for reserves. In addition, it highlights another reason why the mechanisms of local coordination and support within the framework of regional integration might be desirable additions to the current international financial structure. Using a sample of the seven largest Latin American economies, the empirical evidence presented here suggests that countries take into consideration the volatility conditions of their neighbors when determining their own optimal level of reserves. Moreover, given that countries in Latin America appear to purchase insurance against contagion risk, this paper argues that a mechanism of reserve pooling that increases the protection of all members of the pool might reduce the risk of contagion and thereby also reduce the opportunity cost faced by individual countries.

Regional Financial Arrangement in East Asia: Policy Proposal for Strengthening the Chiang Mai Initiative Multilateralization

Since the Asian financial crisis of 1997-98, the East Asian countries have made efforts to guard against the crisis not only by being self-insured through the accumulation of foreign reserves but also by establishing a bilateral or regional financial safety net through the pooling of reserves. Holding ample amount of foreign reserves has proven itself to be useful but it comes with a high price tag. Moreover, in spite of noticeable achievements in recent years, the regional financial arrangement, namely the CMIM framework, had not been activated during the global financial crisis in 2007-08. Ironically, the bilateral currency swaps with the US Federal Reserve Bank played a pivotal role at that time in addressing some Asian countries’ liquidity shortages.The crisis in 2007-08 has provoked a recurring discussion about the necessity of transforming the international monetary system and enhancing the alternative or complementary insurance mechanism of regional financial arrangements to fend off shocks. In the paper, we propose two ways to strengthen a regional financial arrangement in East Asia to make a practical contribution to the global architecture reform agenda and to build a resilient economy: (i) establishing a currency arrangement under CMIM framework to increase the usage of local currencies; and (ii) creating a cooperative framework between the AMRO and the IMF in the area of surveillance.

Varieties of regional monetary cooperation: a tool for reducing volatility in developing economies?

Can regional monetary cooperation shield developing regions from global volatility? The article argues that the main contribution of regional monetary cooperation to enhancing the shock-buffering ability of its member countries is to provide short-term liquidity and to increase regional trade and financial links. In contrast, traditional optimum currency area (OCA) theories formulate the advantages of regional monetary cooperation in terms of allocative efficiency gains and aim at a full currency union as final stage. As such, traditional theory widely ignores the shock-buffering capacity of regional monetary cooperation as well as their varieties. In contrast, the article argues that intermediate stages of regional monetary cooperation have their own rationales related to such shock-buffering capacity. This paper systematically examines the variety of regional cooperation arrangements in the developing world that range from regional payments systems over the pooling of reserves to exchange rate coordination. We propose that the potential for shock buffering is dependent on the chosen form of cooperation. Furthermore, in contrast to full monetary integration, which is highly demanding in terms of policy coordination, the requirements for regional policy coordination are significantly lower, depending on the form and aim of the arrangement.

Regional Public Goods in Finance, Trade and Infrastructure

This paper analyzes the potential for regional collective action in Latin America in the areas of finance, trade and infrastructure. Seven priority areas emerge. First, regional cooperation within increasingly important global financial and trade institutions (the G20, the Financial Stability Board, the Basle Committees, the IMF, the WTO, etc) may enhance the influence of the region in the pursuit of its common interests. Second, regional harmonization of financial markets regulations and cooperation in supervision could play a key role in achieving a safer and more efficient financial integration into the global economy. Integration of regional securities and insurance markets and setting up regional catastrophic insurance facilities may also bring significant efficiency gains. Third, some degree of collective pooling of reserves (through a Regional Monetary Fund) would also contribute to a safer and more efficient financial integration. Fourth, completing missing links in the spaghetti-bowl of regional (and extra regional) free trade areas (FTA's), deepening trade liberalization within them and, especially, harmonizing rules of origin and other trade practices under current overlapping FTA's, could render major efficiency benefits. Fifth, given that at present high freight costs are limiting trade expansion (especially intra-regional trade), even more than remaining tariffs and quotas, selected regional transport infrastructure initiatives and harmonization of regulatory frameworks can lead to significant efficiency gains. Cooperation in logistics and in maritime and air transport negotiations can also deliver large benefits. Sixth, regional infrastructure and regulation in telecommunications and energy can also lead to significant efficiency gains. Regional development banks can contribute to set up or strengthen specialized regional institutions required to solve the complex coordination, cost-allocation, financing and conflict resolution problems that are at present limiting regional collective action in these areas.

Reserve Creation and Reserve Pooling in the International Monetary System

The paper reviews the arrangements for meeting additional post-crisis demand for international liquidity. It distinguishes between reserve creation and reserve pooling as a basis for multilateral liquidity facilities; reserve pooling arrangements carry the risk that, in a general crisis, all the members will want to draw at the same time. We analyse the recently-agreed enlargement of the International Monetary Fund from this perspective, and conclude that the IMF will carry much more liquidity risk after its enlargement than it has done in the past.

Comment on “Chiang Mai Initiative Multilateralization: Origin, Development, and Outlook”

Comment on “Chiang Mai Initiative Multilateralization: Origin, Development, and Outlook”

Evaluating Asian Swap Arrangements

Motivated by the unprecedented rise of swap agreements between the central banks of developed economies and their developing economy counterparts, this paper evaluates Asian swap arrangements and their association with the build-up of foreign reserves prior to the 2008–2009 global financial crisis. The evidence suggests that there is a limited scope for swaps to substitute for reserves. Furthermore, the selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation.

International reserves and swap lines: Substitutes or complements?

Developing Asia experienced a sharp surge in foreign currency reserves prior to the 2008–9 crisis. The global crisis has been associated with an unprecedented rise of swap agreements between central banks of larger economies and their counterparts in smaller economies. We explore whether such swap lines can reduce the need for reserve accumulation. The evidence suggests that there is only a limited scope for swaps to substitute for reserves. The selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation.

Updating China’s International Economic Policy after Thirty Years of Reform and Opening: What Position on Regional and Global Economic Architecture?

The 30 years of reform and opening have brought great material progress to China. By becoming a big country, China’s actions created huge spillovers on other countries. The result has been a rise in trade tension between China and its trade partners. Recently, some have claimed that China’s prolonged large trade surpluses have undermined global financial stability and tilted the world into a deep recession, if not, a 1930s-style depression. Others have claimed that the greenhouse gases from China’s industrialization would soon cause cataclysmic global climate change. One blunt but effective way to eliminate these negative spillovers is to restrict imports from China.Labor in the rich countries are under considerable stress because of the deep global structural adjustments brought by, one, the integration of the labor force of China, India and the Soviet bloc into the world economy; and, two, the acceleration of technological innovations (as exemplified by the revolution in information technology). The new global equilibrium could be a win-win outcome for the world but the process of moving to it is a painful one. Protectionism to avoid the transitional pains is, however, likely to end up in a lose-lose outcome for the world.China must therefore, in its own interests, help to reduce international tension by updating its strategy of international economic engagement. China has to go beyond being a passive beneficiary of the WTO system to being an active promoter of WTO objectives. China should work with the US to bring Doha Rounds negotiations to a successful conclusion. China must also play a stronger and more constructive role in the forthcoming international talks on global climate change. China and India are simply too big to be exempted for a long time from national ceilings on the emission of greenhouse gases. China will have to face down its internal political opposition to replace the backward state-controlled financial system with a dynamic, but well-regulated, diversified private financial system in order to eliminate the odd phenomenon of a poor country lending to a rich country. For its neighborhood, China should push for an Asian Economic Union that takes the form of a WTO-plus free trade and open investment area that has regional pooling of foreign exchange reserves. Since there is no prospect of free labor mobility within East Asia, monetary integration would produce an economically inefficient outcome. East Asia should therefore be focusing its energy on creating as large a free trade area as possible, and forgo the unrealistic goal of a common Asian currency.

Macroeconomic considerations in regional reserve pooling

Traditional approach to optimal reserve determination centres on reserves as adjustments to shocks to the balance of payments. The demand for reserves varies according to the international interest rates, volatility of the terms of trade and the exchange rate regimes (Garcia, 1999). While precautionary motive (Aizenman and Lee, 2005; Li and Rajan, 2005) continues to dominate the changing motive of reserve accumulation in East Asia, the literature on optimal reserve allocation has shifted to the strategic issue of reserve pooling (Rajan and Siregar, 2002; Wan, 2005, 2006), to mobilize the vast pool of reserves exceeding the optimal level for regional investment in East Asia. Using cointegration analysis to determine the key macroeconomic variables such as import-reserve ratio, trade openness, short-term indebtedness, volatility of exports, net capital inflow as well as the interest rate spread between US Treasury rates and regional average lending rates, this article attempts to develop a regional framewor...

RESERVE POOLING AND ITS IMPLICATION ON OPTIMUM CURRENCY AREA IN ASEAN

Regional economic integration in ASEAN, ASEAN Free Trade Area (AFTA), is expected to produce positive outcomes on economic growth in ASEAN especially through its impact on trade and investment. This idea can be strengthened if regional monetary integration is followed. Therefore, focusing on reserve pooling, which is one of the proxy for Optimum Currency Area (OCA) variables, this study intends to examine the feasibility of a common currency in ASEAN. In addition, this study also investigates this idea in the presence of external shock.

Updating China's international economic policy after 30 years of reform and opening: what position on regional and global economic architecture?

The 30 years of reform and opening have brought great material progress to China. By becoming a big country, China's actions created huge spillovers on other countries. The result has been a rise in trade tension between China and its trade partners. Recently, some have claimed that China's prolonged large trade surpluses have undermined global financial stability and tilted the world into a deep recession, if not a 1930s-style depression. Others have claimed that the greenhouse gases from China's industrialization would soon cause cataclysmic global climate change. One blunt but effective way to eliminate these negative spillovers is to restrict imports from China. Labor in the rich countries is under considerable stress because of the deep global structural adjustments brought by: (1) the integration of the labor force of China, India and the Soviet bloc into the world economy; and (2) the acceleration of technological innovations (as exemplified by the revolution in information technology). The new global equilibrium could be a win-win outcome for the world but the process of moving to it is a painful one. Protectionism to avoid the transitional pains is, however, likely to end up in a lose-lose outcome for the world. China must therefore, in its own interests, help to reduce international tension by updating its strategy of international economic engagement. China has to go beyond being a passive beneficiary of the WTO system to being an active promoter of WTO objectives. China should work with the US to bring Doha Rounds negotiations to a successful conclusion. China must also play a stronger and more constructive role in the forthcoming international talks on global climate change. China and India are simply too big to be exempted for a long time from national ceilings on the emission of greenhouse gases. China will have to face down its internal political opposition to replace the backward state-controlled financial system with a dynamic, but well-regulated, diversified private financial system in order to eliminate the odd phenomenon of a poor country lending to a rich country. For its neighborhood, China should push for an Asian Economic Union that takes the form of a WTO-plus free trade and open investment area that has regional pooling of foreign exchange reserves. Since there is no prospect of free labor mobility within East Asia, monetary integration would produce an economically inefficient outcome. East Asia should therefore be focusing its energy on creating as large a free trade area as possible, and forgo the unrealistic goal of a common Asian currency.

Regional Monetary Arrangements in Asean+3 as Insurance Through Reserve Accumulation and Swaps

East Asia is witnessing the emergence of an informal monetary system which focuses on self-insurance through own reserve accumulation and co-insurance through swaps. The former is concentrated in a small number of large countries (China, Japan, and Korea), while the latter involves informal monetary cooperation among monetary authorities in a large number of countries. The origins of this system lie in the Asian financial crises, and reflect concerns both to avoid repetition of similar events and any spread of further crises through contagion effects. This paper first characterizes and documents this emerging system describing how it works and what its objectives are, and then discusses its performance, its incompleteness, and assesses the system's ability to move towards deeper integration without adopting a single monetary authority as well as the impediments it faces. What is clear is that this type of system among individual countries is incomplete and falls well short of complete monetary integration, but at present it performs well even if it experiences a number of deficiencies. Most countries seem better off with partial reserve pooling, while incremental gains from higher degrees of pooling in the region tend to be small.

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.

Foreign exchange markets in South-East Asia 1990–2004: An empirical analysis of spillovers during crisis and non-crisis periods

The East Asian crisis of 1997 sparked an extensive literature in an effort to explain the causes and spread of heightened foreign exchange (FX) market pressures in the region. In this paper, we model FX movements and calculate spillover effects covering the extended period between 1990 and 2004. Using Markov switching vector autoregressions, we find evidence that FX correlations vary across crisis and non-crisis states, a result that bears implications for international portfolio diversification and reserve pooling. Even though the direction of effects does not follow discernible patterns, it is clear from the data that contagion effects are present.

Reserve Pooling in the Eastern Caribbean Currency Union and the CFA Franc Zone: A Comparative Analysis

The paper presents a comparison of the gains from the pooling of reserves, and hence reserve variability, in the Eastern Caribbean Currency Union (ECCU) and the CFA franc zone. The results indicate that countries within the ECCU area have achieved greater balance of payments protection than the CFA zone countries from the pooling of reserves. Unanticipated changes in the terms of trade lowered reserves in the CFA relative to the ECCU, which may reflect a greater reliance on primary commodities in the CFA compared with services in the ECCU.

Reserve Pooling in the Eastern Caribbean Currency Union and the Cfa Franc Zone A Comparative Analysis

Reserve Pooling in the Eastern Caribbean Currency Union and the Cfa Franc Zone A Comparative Analysis

Reserve Pooling in Asia and the Far East

One of the forms of payments arrangements among the developing countries recognized by the Group of Experts appointed by United Nations Conference on Trade and Development (UNCTAD) [6] is the establishment of a reserve fund by pooling the reserves of the interested countries. The Committee on Invisibles and Financing Related to Trade of UNCTAD recommended that "the pooling of the reserves of the developing countries in particular regions should be considered" [7, Annex I, p. 9]. While a great deal of talk about other forms of payments arrangements has been going on in the region denned by the United Nations Economic Commission for Asia and the Far East (to be called Asia and the Far East region in the paper) i, not much has yet been thought about the possibilities of the formation of reserve funds on regional or subregional basis as a possible measure toward the cherished goal of regional economic cooperation unanimously adopted at the Ministerial Conference on Asian Econo¬mic Cooperation held in Manila [9]. The purpose of this paper is to theoretically examine the rationale for reserve pooling among a group of countries and then to apply this theory to explore the possibilities of gains from reserve pooling on both regional and subregional basis in Asia and the Far East region.

The National Insurance Funds

UNDER Part III, sects. 35 and 36 of the National Insurance Act, I946, provision is made for the investment of funds accumulated under the new National Insurance scheme through the excess of contributions over benefits. Into the National Insurance Fund will be paid over all contributions by employers, employees and self-employed persons together with the Exchequer Supplement and any surplus will be invested by the National Debt Commissioners as directed by the Treasury. The latter is authorised by Parliament to invest these funds in savings bank funds. But quite apart from the National Insurance Fund, which is the working balance of the scheme, the Act by sect. 36 also brings into being another new fund known as the National Insurance (Reserve) Fund. Into it will be paid over not only any surplus from the working balance but also all the assets of the various state insurance and pensions schemes in operation before the passing of the Act and which are now superseded by the new scheme. The transferred funds are listed in the Tenth Schedule of the Act. They include the Unemployment Fund set up under the Unemployment Insurance Act, I935, the various Health Insurance Funds and Pension Accounts, in all some 13 separate funds authorised by legislation within the last I2 years. Apart from these assets, the Reserve Fund will take over all assets of Approved Societies which are attributable to business under the enactments repealed by this Act or under corresponding enactments previously repealed . Figures of the total assets transferred are not yet available but the total of securities held by the Health Insurance Funds and by the Unemployment Fund on July 4th, I948, amounted to approximately t723 mi.1 (cf. Table I below). The first important change in financial administration has thus introduced considerable simplification. It will no longer be necessary to audit a large number of separate accounts set up under a long series of Acts. Secondly, the pooling of reserves will allow a greater flexibility in financial policy. The second major change in financial administration is in the control of the funds themselves. Prior to the passing of the Act, control of