Working Paper: NBER ID: w12734
Authors: Joshua Aizenman
Abstract: The paper assesses the costs and benefits of active international reserve management (IRM), shedding light on the question of how intense should IRM be for an emerging market. In principle, an active IRM strategy could lower real exchange rate volatility induced by terms of trade shocks; provide self insurance against sudden stops; reduce the speed of adjustment of the current account; and even allow for higher growth if it fosters exports ("mercantilist" motive). The message of the report is mixed -- management of reserves is not a panacea. The mercantilist case for hoarding international reserves, as an ingredient of an export led growth strategy, is dubious. Done properly, IRM augments macro economic management in turbulent times, mitigating the impact of external adverse shocks and allowing for a smoother current account adjustment. These benefits are especially important for commodity exporting countries, and countries with limited financial development.
Keywords: International Reserves; Current Account; Emerging Markets; Macroeconomic Management
JEL Codes: F15; F32; F36; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| active international reserve management (IRM) (F33) | lower real exchange rate volatility (F31) |
| lower real exchange rate volatility (F31) | better economic performance (P17) |
| higher reserves (E51) | reduce downside risk associated with adverse shocks (G52) |
| higher buildup of reserves (E60) | reduce speed of adjustment of the current account (F32) |
| mercantilist motive for hoarding reserves (F52) | higher growth through fostering exports (O19) |