Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi
Chapter 5: Macroeconomic Impacts of Foreign Exchange Reserve Accumulation: Theory and International Evidence
Shin-ichi Fukuda and Yoshifumi Kon 5.1 INTRODUCTION Beginning in the late 1990s, a dramatic accumulation in foreign exchange reserves has been widely observed in emerging market and developing economies. As a result, by 2005 foreign exchange reserves of emerging market and developing economies, primarily in Asia and the Middle East, far exceeded those of industrial economies (Figure 5.1). During the Asian crisis of 1997–98, emerging market and developing economies with smaller liquid foreign assets had difficulty averting panic billions of SDRs 2500 Emerging and developing economies 2000 1500 1000 500 0 1980 Advanced economies Asia PRC Middle East 1985 1990 1995 2000 2005 Notes: PRC = People’s Republic of China; SDRs = Special Drawing Rights. Emerging market and developing economies include the PRC. Asia includes the PRC, but not Japan. Monthly, end of period. Source: International Monetary Fund (2006). Figure 5.1 Total reserves minus gold in emerging market and developing economies 1980–2005 120 M2840 - KAWAI 9780857933348 PRINT.indd 120 24/01/2012 13:18 Macroeconomic impacts of foreign exchange reserve accumulation 121 in the financial markets and preventing sudden reversals in capital flows (see, for example, Corsetti et al. 1999; Sachs and Radelet 1998). Many emerging market and developing countries thus have recognized the importance of increased liquidity as a form of self-protection against crises. Replacing liquid, short-term debt with illiquid, long-term debt was a popular policy recommendation, at least initially. Ultimately, however, the course of action that most emerging market and developing economies took more seriously was raising foreign reserves. The...
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