Working Paper: NBER ID: w19791
Authors: Matthieu Bussire; Gong Cheng; Menzie D. Chinn; Noemie Lisack
Abstract: Based on a dataset of 112 emerging economies and developing countries, this paper addresses two key questions regarding the accumulation of international reserves: first, has the accumulation of reserves effectively protected countries during the 2008-09 financial crisis? And second, what explains the pattern of reserve accumulation observed during and after the crisis? More specifically, the paper investigates the relation between international reserves and the existence of capital controls. We find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly if associated with a less open capital account. In the immediate aftermath of the crisis, countries that depleted foreign reserves during the crisis quickly rebuilt their stocks. This rapid rebuilding has, however, been followed by a deceleration in the pace of accumulation. The timing of this deceleration roughly coincides with the point when reserves reached their pre-crisis level and may be related to the fact that short-term debt accumulation has also decelerated in most countries over this period.
Keywords: International Reserves; Financial Crisis; Emerging Economies; Capital Controls
JEL Codes: F31; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| depleting reserves during the crisis (H12) | rebuilding reserves quickly afterward (F35) |
| rebuilding reserves quickly afterward (F35) | deceleration in accumulation rate (E11) |
| growth of short-term debt (H63) | reserve accumulation (E21) |
| higher reserves relative to short-term debt (F34) | less severe output losses during the 2008-09 financial crisis (F65) |
| stricter capital controls (F38) | more pronounced effect of reserves on growth (O42) |