| Abstract: |
This paper examines past evidence of prolonged periods of reserve accumulation
in Asian emerging market economies and the direct and indirect implications
for monetary stability through the potential impact of such episodes on
financial stability. The empirical research focuses on identifying periods of
prolonged interventions and correlations with key macrofinancial aggregates.
Related changes in central bank balance sheets are also examined, especially
in periods when the interventions are linked to strong capital inflows. In
particular, we consider whether changes in the central bank's balance sheet
from prolonged intervention lead to spillovers to the balance sheet of the
private sector. We explore the possible forms of the spillovers and the
consequences on asset prices (e.g., housing prices, equity prices, the growth
in domestic credit). Policy implications are drawn. Finally, we propose a new
indicator of reserves adequacy and excessive foreign exchange reserves
accumulation based on a factor model. Two broad conclusions emerge from the
stylized facts and the econometric evidence. First, the best protection
against costly reserves accumulation is a more flexible exchange rate. Second,
the necessity to accumulate reserves as a bulwark against goods price
inflation is misplaced. Instead, there is a strong link between asset price
movements and the likelihood of accumulating foreign exchange reserves that
are costly. |