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The Foreign Exchange Reserves Buildup: Business as Usual?

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The Foreign Exchange Reserves Buildup: Business as Usual? Charles Wyplosz Graduate Institute of International Economics and CEPR Workshop on Debt, Finance and ... – PowerPoint PPT presentation

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Title: The Foreign Exchange Reserves Buildup: Business as Usual?


1
The Foreign Exchange Reserves Buildup Business
as Usual?
  • Charles Wyplosz
  • Graduate Institute of International Economics
  • and CEPR
  • Workshop on Debt, Finance and Emerging Issues
  • in Financial Integration, 6-7 March 2007

2
The issue
Excessive?
3
Need to answer two questions
  • Measurement
  • Criteria
  • Both related to motive

4
Measurement
  • Nominal reserve stocks
  • Usual scale variables
  • GDP
  • Trade (imports, exports)

5
Measurement
  • Nominal reserve stocks
  • Usual scale variables
  • GDP
  • Trade (imports, exports)
  • Popular rules
  • 3 months of imports
  • Stock of short-term external liabilities
  • Greenspan-Guidotti-Fischer rule

6
A different picture
Excessive?
7
The impact of financial globalization
8
More details Who does it?
9
More details Who does it and why?
10
And some outliers
11
Excessive?
  • The motives approach
  • The cost-benefit approach

12
Motives
  • Self-insurance
  • Shifting risks
  • from trade balance to capital account
  • from 3 months of imports to Greenspan-Guidotti-Fis
    cher rule
  • Mercantilism
  • Variant 1 Export-led growth strategy
  • Variant 2 Keep savings home
  • Variant 3 Hold reserves for the sake of it
  • Variant 4 Directed credit

13
Testing motives
  • Aizenman and Lee (2006)
  • Strong effect of variables related to
    self-insurance
  • Capital account liberalization
  • Crisis dummies
  • Some effect of variables related to mercantlism,
    but much weaker
  • Undervaluation
  • Export growth

14
Testing motives
  • Aizenman and Lee (2006)
  • Jeanne and Rancière (2006)
  • Model of self-insurance
  • Reserve build-up well explained
  • But some outliers in South-East Asia

15
Testing motives
  • Aizenman and Lee (2006)
  • Jeanne and Rancière (2006)
  • Official and unofficial statements
  • Conclusion self-insurance and fear of IMF

16
Costs and benefits
  • Costs
  • Direct costs
  • Rodrik (2006) 1 of GDP for reserves 30 of GDP
  • Opportunity costs
  • Better returns at home (private and public)
  • The case of China

17
Costs and benefits
  • Costs
  • Benefits
  • Export-led growth
  • Self-insurance

18
Export-led growth
  • Apparently successful, so a benefit?
  • Only if systematic undervaluation works
  • No evidence that it does
  • No theory
  • Nominal vs. real exchange rate
  • Strong foreign demand inflation
  • Unless domestic demand is weak
  • High saving is the key success factor
  • But then what to do with the savings?
  • Invest at home or abroad

19
Self-insurance
  • Currency crises can be very expensive
  • A good reason to buy insurance
  • Do high reserve stocks provide insurance?
  • Not really an insurance
  • Reduce the odds of crisis
  • Unlikely to eliminate the threat
  • False sense of immunity
  • Could discourage reforms
  • Could encourage imprudent policies

20
Wrap-up
  • Limited evidence of excessive accumulation
  • Some prominent exceptions
  • Little evidence of mercantilist motive
  • Mostly self insurance
  • Recent build-up is business as usual
  • What has been unusual is financial gloablization
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