The determinants of international reserves in developing countries

Abstract

Motivated by the recent surge in international reserve holdings in developing countries, this study aims to investigate the determinants of international reserves in developing countries. Two main engaging theories were used in this study, namely, the mercantilist and precautionary views for the demand in international reserves. This study analyzed the data of 21 developing countries over the period 2003-2015 using the static linear panel method. The findings showed that mercantilist motives, such as trade value and exchange rate, are positive determinants of international reserves. As for the view from the angle of precautionary motives, an expansionary monetary policy with an increase in money supply and a decrease in the domestic interest rate will encourage higher international reserve holdings in countries. However, an increasing public debt will lower international reserve holdings. The oil shock of 2013-2015 was the biggest oil price drop in the history. The findings show oil shock will reflect the international reserves holding decrease. Some policy implications are suggested such as diversification and substitution of international reserves holdings. The cooperation between oil export countries are important to stabilizing the oil market and oil price to avoid the depletion of international reserves holdings.