International Reserves, Current Account Imbalance and Short Term External Debt: A Comparative Study

Abstract

This paper examines the behavior of international reserve holdings in East Asia, ASEAN5, and non-ASEAN countries during the period 1970-2005 using panel cointegration and FMOLS. The panel cointegration tests find the existence of long run relationship between international reserve holdings and its determinants. The panel group FMOLS results indicate that current account balance is statistically significant and exert a positive impact on international reserve holdings in East Asia, ASEAN5 and non-ASEAN countries while short term external debt shows a positive and negative impact on international reserve holdings in ASEAN5 and non-ASEAN countries, respectively. Keywords:International reserves, Current account imbalance, Short term external debt, East Asia IntroductionEast Asian economies have been holding high level of international reserves since the 1997 East Asian financial crisis. Among the East Asian countries, China, Japan, Hong Kong, Korea, Malaysia, Taiwan, and Singapore are ranked among the top reserve holders. Even though reserves can provide liquidity and returns, there are several implications associated with high reserve holding. High reserve holdings in these countries in recent years reflect the prudence in their economic policies, high growth prospect, and surplus in their trade accounts. At the same time, high reserves are associated with the global external payments imbalances (World Bank, 2005).The present paper analyzes the behavior of international reserve holdings in three groups of East Asian countries namely East Asia (Indonesia, China, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand), ASEAN5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand), and non-ASEAN countries (China, Japan, Korea, and Taiwan) using panel cointegration and Fully Modified Ordinary Least Squares (FMOLS). The study includes Indonesia, the Philippines, and Thailand because, like the rest of the countries, these ASEAN countries have also increased their international reserve holdings after the crisis.Previous studies on international reserve holdings using pooled cross section and time series data have analyzed the behavior of international reserve holdings using data from developed countries (for instance, Bahmani-Oskooee, 1984Edwards, 1984b;Flood & Marion, 2002;Bahmani-Oskooee & Brown, 2004) and developing countries (for instance, Iyoha, 1976;Edwards, 1984aEdwards, , 1985Aizenman & Marion, 2003;Mendoza, 2004; Zhou, 2005; Ra, 2006). Studies that compare the behavior of international reserve holdings for both developed and developing countries include Frenkel (1980), Bahmani-Oskooee (1987), Lane and Burke (2001) Even though studies by Gosselin and Parent (2005) and Cheung and Xing (2007) have analyzed the behavior of international reserve holdings in the Asian context, comparison between different groups of countries have not been made. Therefore, the study intends to fill up this gap in the literature. The present study also differs from previous studies in a way that it all...

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The Impacts of Remittances on Foreign Reserves of Pakistan: Does Pakistan Suffer from Dutch Disease?

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Bank excess reserves in emerging economies: A critical review and research agenda

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