Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
IMF Working Papers, June 1, 2007
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- Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
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Bibliographic details
- Authors: Enrique G. Mendoza, Ceyhun Bora Durdu, Marco Terrones
- Published: June 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867107.001
Authors and publication
- By Enrique G. Mendoza, Ceyhun Bora Durdu, Marco Terrones
- June 1, 2007
- IMF Working Papers, Working Paper No. 2007/146
- Pages: 54
- Volume: 2007; Issue: 146
- DOI: https://doi.org/10.5089/9781451867107.001
- Stock No: WPIEA2007146
- ISBN: 9781451867107
- ISSN: 1018-5941
Research question and framework
- Objective: Quantitative assessment of the “New Merchantilism” interpretation that the surge in foreign reserves reflects precautionary war-chest accumulation against Sudden Stops.
- Framework components:
- Precautionary savings affecting foreign assets.
- Channels: business cycle volatility, financial globalization, and endogenous Sudden Stops.
- Focus on emerging economies that experienced Sudden Stops in the 1990s.
Key findings
- Financial globalization and Sudden Stop risk:
- Financial globalization is a plausible explanation of the surge in foreign reserves.
- Sudden Stop risk is a plausible explanation of the surge in foreign reserves.
- Business cycle volatility:
- Cyclical volatility has declined in the globalization period and is not a plausible explanation of the surge in reserves.
- Overall conclusion:
- The surge in reserves since the 1990s can be accounted for by precautionary demand through the channels of financial globalization and endogenous Sudden Stop risk, but not by changes in business cycle volatility.
Subjects and keywords
- Subject: Balance of payments; Consumption; External position; Foreign assets; Globalization; National accounts; Precautionary savings; Sudden stops
- Keywords: business cycle; business cycle volatility; Consumption; D. baseline result; debt limit; effects of Volatility; Foreign assets; Global; globalization period; precautionary demand; Precautionary savings; Sudden Stop economy; Sudden stops; WP
Source: IMF Working Paper — "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism", Enrique G. Mendoza, Ceyhun Bora Durdu, Marco Terrones, June 1, 2007.