The Determinants of International Reserves in the Emerging Countries: a Non-Linear Approach

Delatte, Anne-Laure and Fouquau, Julien (2009): The Determinants of International Reserves in the Emerging Countries: a Non-Linear Approach.

Abstract

In this paper we adopt a non linear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a panel smooth transition model, that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a non linear behavior in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables- out of seven candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.

• Item Type: MPRA Paper
• Language: English
• Keywords: International Reserves, Precautionary Demand, Mercantilist, Global Imbalances, Panel Smooth Threshold Regression Models.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Aizenman J., Lee J. 2007. International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence, Open Economic Review, vol. 18(2), 23-45.

Aizenman, J., Marion N. 2004. International Reserve Holdings with Sovereign Risk and Costly Tax Collection, Economic Journal.

Bernanke, B.S. 2005. The Global Saving Glut and the U.S. Current Account Deficit, Sandridge Lecture, March, 10, 2005.

Bessec M. Fouquau, J. 2008. The non-linear link between electricity consumption and temperature in Europe: a threshold panel approach. Energy Economics, vol. 30, 2705-2721 .

Bird, G., Rajan, R. 2003. Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises. World Economy, vol. 86, 873-91.

Colletaz G., Hurlin C. 2006. Threshold effects in the public capital productivity: an international panel smooth transition approach. Document de Recherche du Laboratoire d'Economie d'Orléans, 2006-1.

Davies R.B. 1987. Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika 74, 33-43.

Dooley, M., Folkerts-Landau, D. and Garber, P. 2003. An essay on the revived Bretton Woods system. NBER Working Paper No. 9971.

Edwards, S. 2005. Capital Controls, Sudden Stops and Current Account Reversals, NBER Working Paper No. 11170.

Fouquau J. Hurlin C., Rabaud I. 2008. The Feldstein-Horioka Puzzle: a Panel Smooth Transition Regression Approach. Economic Modelling, 20, pp.284-299.

Frenkel, J.A. 1974. The Demand for International Reserves by Developed and Less-Developed countries. Economica, vol. 41(161), 14-24.

González A., Teräsvirta T., van Dijk D. 2005. Panel smooth transition regression models. SEE/EFI Working Paper Series in Economics and Finance, No. 604.

Greenspan, A. 1999. Currency Reserves and Debt. Remarks before the World Bank Conference on Recent Trends in Reserves Management, Washington, D.C. April 29.

Hansen B.E. 1999. Threshold effects in non-dynamic panels: estimation, testing, and inference. Journal of Econometrics 93, 334---368.

Heller, H.R. 1966. Optimal International Reserves. Economic Journal. vol. 76, 296-311.

Krugman, P. Obstfeld, M. 2008. International Economics, Ed 11th, Pearson.

Lane P.R., Milesi-Ferretti, G.M. 2006. The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004. CEPR Discussion Paper No. 5644.

Obstfeld, M, Shambaugh, J., C. Taylor, A. M, 2008, Financial Stability, the Trilemma and International Reserves. AEA meeting in San Fransisco 2009.

Winjholds, J. de Beaufort O., Kapteyn A., Reserve Adequacy in Emerging Market Economies, IMF Working Paper No. 01/143, 1-49.