Large hoardings of international reserves: are they worth it?
Several Asian economies have accumulated large stocks of international reserves over the last few years. This motivates the question we address in this paper from an empirical point of view. Are these large increases in reserves an efficient crisis-prevention strategy? Or are they second-best to other options, such as improving governance and developing better institutions in the financial markets? The current literature does not reach a firm consensus. A number of studies argue that reserve accumulation reduces the likelihood of self-fulfilling speculative attacks. Others, however, stress that reserve accumulation is a relatively costly self-insurance strategy. Moreover, reserve accumulation could also be a counterproductive strategy, while crises are likely to be deeper in the presence of weak financial systems.