International Reserves Management and the Current Account

52 Pages Posted: 7 Dec 2006 Last revised: 19 Oct 2022

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

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Date Written: December 2006

Abstract

The paper assesses the costs and benefits of active international reserve management (IRM), shedding light on the question of how intense should IRM be for an emerging market. In principle, an active IRM strategy could lower real exchange rate volatility induced by terms of trade shocks; provide self insurance against sudden stops; reduce the speed of adjustment of the current account; and even allow for higher growth if it fosters exports ("mercantilist" motive). The message of the report is mixed -- management of reserves is not a panacea. The mercantilist case for hoarding international reserves, as an ingredient of an export led growth strategy, is dubious. Done properly, IRM augments macro economic management in turbulent times, mitigating the impact of external adverse shocks and allowing for a smoother current account adjustment. These benefits are especially important for commodity exporting countries, and countries with limited financial development.

Suggested Citation

Aizenman, Joshua, International Reserves Management and the Current Account (December 2006). NBER Working Paper No. w12734, Available at SSRN: https://ssrn.com/abstract=948647

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

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