| Abstract: |
We evaluate the impact of the global financial crisis (GFC) and recent
structural changes in the patterns of hoarding international reserves (IR). We
confirm that the determinants of IR hoarding evolve with developments in the
global economy. During the pre-GFC period of 1999-2006, gross saving is
associated with higher IR in developing and emerging markets. The negative
impact of outward direct investment on IR accumulation is consistent with the
recent trend of diverting international assets from the international reserve
account into tangible foreign assets; the "Joneses' effect" lends support to
the regional rivalry in hoarding IR as a motivation; and commodity price
volatility induces precautionary buffer hoarding. During the 2007–2009 GFC
period, previously significant variables become insignificant or display the
opposite effect, probably reflecting the frantic market conditions driven by
financial instability. Nevertheless, the propensity to import and gross saving
continue to display strong and even larger positive effects on IR holding. The
results from the 2010–2012 post-GFC period are dominated by factors that had
been mostly overlooked in earlier decades. While the negative effect of swap
agreements and the positive effect of gross saving on IR holdings are in line
with our expectations, we find a change in the link between outward direct
investment and IR in the pre- and post-crisis period. The macro-prudential
policy tends to complement IR accumulation. Developed countries display
different demand behaviors for IRs -- higher gross saving is associated with
lower IR holding, possibly reflecting high-income countries' tendency to
deploy their savings in the global capital markets. The presence of sovereign
wealth funds motivates developed countries to hold a lower level of IR. Our
predictive exercise affirms that an emerging market economy with insufficient
IR holdings in 2012 tends to experience exchange rate depreciation against the
U.S. dollar when many emerging markets were adjusted to the news of tapering
quantitative easing (QE) in 2013. |