Woo Jin Choi, Alan Taylor, 22 May 2017

Widening global imbalances, driven by reserve accumulation, can help us investigate how real exchange rates are determined. Standard theory would predict real exchange rate appreciation when there is an increase in net foreign assets. This column uses recent data from 75 countries to argue that, in practice, there is the opposite correlation in the particular case of reserve accumulation, notably in countries with higher capital controls and in developing countries.

Willem Thorbecke, 06 November 2014

Foreign reserve accumulation by China and other east Asian countries has been a controversial way to boost exports. This column argues that it is not even in their own national interests. The policy has been ineffective in maintaining China’s ordinary trade surplus, while its processing trade surplus continues to rely on devaluation in countries further up the supply chain. Foreign reserve divestment would increase purchasing power in east Asian countries, free up government revenue, and be innocuous to export competition if properly coordinated.

Anton Korinek, Luis Servén, 10 May 2010

The large foreign-exchange reserves held by emerging markets continue to stoke debate. This column suggests that reserve hoarding leads to a lower exchange rate and encourages the learning-by-doing externalities of export-led growth without the need for direct subsidies. But while this strategy can be welfare increasing, the chances of this are reduced the more countries embrace it.

Maurice Obstfeld, Jay Shambaugh , Alan Taylor, 11 October 2008

Developing country central banks’ unprecedented accumulation of foreign reserves lies at the heart of global imbalances, but the trend has puzzled international macroeconomists. This column explains the great accumulation as a response to the dangers of financial instability.