Working Paper: NBER ID: w15308
Authors: Joshua Aizenman; Yi Sun
Abstract: In this paper we study the degree to which Emerging Markets (EMs) adjusted to the global liquidity crisis by drawing down their international reserves (IR). Overall, we find a mixed and complex picture. Intriguingly, only about half of the EMs depleted their IR as part of the adjustment mechanism. To gain further insight, we compare pre-crisis demand for IR of countries that experienced sizable IR depletion, to that of countries that did not, and find different patterns between the two groups. Trade related factors (such as trade openness, primary goods export ratio, especially large oil export) seem to play a significant role in accounting for the pre-crisis IR/GDP level of countries that experienced a sizable IR depletion during the first phase of crisis. Our findings suggest that countries that internalized their large exposure to trade shocks before the crisis, used their IR as a buffer stock in the first phase of the crisis. Their reserves losses followed an inverted logistical curve. After a rapid initial depletion of reverses, within seven months they reached a markedly declining rate of IR depletion, losing not more than one-third of their pre crisis IR. On the contrary, in case of countries that refrained from a sizable IR depletion during the first phase of crisis, financial factors seem more important than trade factors in explaining the initial IR/GDP level. Our results indicate that the adjustment of EMs was constrained more by their fear of losing IR than by their fear of floating.
Keywords: international reserves; emerging markets; financial crisis; trade openness; reserve depletion
JEL Codes: F15; F31; F32; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade openness (F43) | pre-crisis IR/GDP levels (F50) |
| primary goods export ratios (F10) | pre-crisis IR/GDP levels (F50) |
| trade factors (F10) | IR depletion (F50) |
| high trade dependence (F10) | significant IR losses (G33) |
| fear of losing IR (F50) | reserve management strategies (Q26) |
| IR depletion (F50) | larger currency depreciations (F31) |