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Working Paper

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Monetary policy, Foreign exchange reserves, Balance of Payments, International finance, Globalization, Inflation, Macroeconomics


We evaluate the global financial crisis (GFC) and the structural changes of recent years that have been associated with new patterns of hoarding international reserves. We confirm that the determining factors of international reserves are evolving with developments in the global economy. From 1999–2006, the pre-GFC period, gross saving is associated with higher international reserves in developing and emerging markets. An outward direct-investment effect is consistent with the view of diverting international assets from the international reserve account, the “Joneses’ effect” lends support to the rivalry hoarding motivation, and commodity price volatility induces hoarding against uncertainty. During the 2007–2009 GFC, those variables became insignificant or displayed the opposite effect, probably reflecting the frantic market conditions that prevent a normal economic relationship to hold. Nevertheless, the propensity to continue to trade displays a strong positive effect. The 2010–2012 post-crisis results are dominated by factors that have been mostly overlooked in earlier decades. While the effects of swap agreements and gross saving are in line with expectations, we find a change in the link between outward direct investment and international reserves in the pre- and post-crisis period. The macro-prudential policy is found to complement international reserve accumulation. Developed countries display very different demand behaviors for international reserves. Higher gross saving has been associated with lower international reserve holding because developed countries are more likely to deploy their savings in the global capital market. The presence of sovereign wealth funds is associated with a lower level of international reserve holding in industrial countries. Our predictive exercise affirms that if an emerging market economy experienced a deficiency in international reserves holdings in 2012, that economy tended to experience exchange-rate depreciation against the U.S. dollar during the recent adjustment to the news of tapering quantitative easing (QE) in 2013.


Copyright 2014 by Joshua Aizenman, Yin-Wong Cheung, and Hiro Ito. All rights reserved. Archived here with author permission.

NBER working papers are circulated for discussion and comment purposes. They have not been peer reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Subsequently published by Elsevier in the Journal of International Money and Finance.



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