Financial Versus Monetary Mercantilism: Long-Run View of the Large International Reserves Hoarding

Abstract

The sizable hoarding of international reserves by several East Asian countries has been frequently attributed to a modern version of monetary mercantilism - hoarding international reserves in order to improve competitiveness. From a long-run perspective, manufacturing exporters in East Asia adopted financial mercantilism - subsidizing the cost of capital - during decades of high growth. They switched to hoarding large international reserves when growth faltered, making it harder to disentangle the monetary mercantilism from a precautionary response to the heritage of past financial mercantilism. Monetary mercantilism also lowers the cost of hoarding through its short-term boost to external competitiveness, but may be associated with negative externalities leading to competitive hoarding.

Keywords: Mercantilism, cost of capital, competitive real depreciations, self insurance, precautionary hoarding

JEL Classification: F15, F31, F43