Revisiting Mrs. Machlup's wardrobe: the accumulation of international reserves, 1992–2001

Abstract

A fature of the late 1990s was the accumulation of International reserves in many countries. Against the background of this phenomenon, in what follows we investigate the following questions: how widely has the tendency to accumulate reserves been seen? Does the incidence of a currency crisis increase the subsequent demand for reserves? Do countries make choices between different combinations of exchange rate regime and reserve holding? Does an arrangement with the IMF encourage countries subsequently to build up reserves more than they otherwise would have done? Do different patterns emerge depending upon the measure of reserves used? In addressing the above questions, we find significant support for the ‘Mrs. Machlup’s Wardrobe Theory' of international reserves, which purports that irrespective of the amount of reserves countries have accumulated, they continue to add to their stock.

Notes

¹ See Aizenman and Marion, 2001.

² Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey.

³ Levin et al. (2002) and Im et al. (2003) panel unit root tests provide evidence that the logged series are stationary. These tables and descriptive statistics are available from the authors.

⁴ This definition of a crisis has been used in several studies in the literature. For a review see Chui and Gai (2005).

⁵ The two dummies have a low degree of correlation of about 21%.

Table 1. Static panel with country and time effects – all economies

Table 2. Static panel with country and time effects – emerging economies

⁶ The reserves-to-external-debt ratio is the exception to this trend.

Fig. 2. Increasing time effects, all economies