Accumulation of large foreign reserves in China: a behavioural perspective

Abstract

The nal publication is available at Springer via http://dx.doi.org/10.1007/s10644-012-9136-1.Additional information: Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. Accumulation of Large Foreign Reserves in China:A behavioural perspective AbstractThe massive accumulation of foreign reserves by China has challenged the conventional thinking about prudent reserve management. This paper develops a behavioural model of optimal decision making under uncertainty to explain the observed Chinese reserve policy. Departing from the conventional approach to utility maximisation based on the agent's rationality, this paper explicitly models the behaviour of Chinese central banker who is influenced by loss aversion and narrow framing. Embedding the cognitive biases into the precautionary savings approach to holding reserves, the paper shows the behavioural optimality of Chinese reserve build-up and provides a plausible explanation of the dynamics of reserve accumulation in China, hence help make sense of the puzzling Chinese reserve policy.

Investigating the efficiency of foreign exchange reserves using stochastic frontier analysis: Evidence across the globe

“…There are a lot of countries that have a comfortable zone regarding the number of foreign exchange reserves (Edison, 2003; Porter, 2013; Porter 2015). Many researchers claim the benchmark system of management of foreign reserves as an appropriate amount of foreign reserves with countries (Zhang, Chau, & Xie, 2013). Most of the countries have foreign exchange reserves that can be defined as excess reserves, and from this point of phenomenon (Rane, 2006), the question of efficiency arises.…”