Large Hoarding of International Reserves and the Emerging Global Economic Architecture

The emerging financial configuration of developing countries has been growing managed exchange rate flexibility, greater monetary independence and deeper financial integration. Hoarding international reserves is a key ingredient enhancing the stability of this emerging configuration. International reserves help by providing self‐insurance; mitigating real exchange rate effects of terms of trade shocks; and export promotion. Countries following an export‐oriented growth strategy may end up with competitive hoarding, akin to competitive devaluations. The size of China and its lower sterilization costs suggest that China may be the winner of a hoarding game. Testing precautionary motives may be challenged by the ‘peso problem’.