International Reserves Accumulation: Some Lessons from Asia

Abstract

This paper examines the global implications from recent reserve accumulation in Asia. Advances in information technology and closer integration of world markets have complicated economic policymaking by increasing countries’ vulnerability to capital account crises and introducing new channels of risk transmission. To safeguard against these developments, many countries accumulated unprecedented levels of international reserves. Current account deficits in some industrial countries have supported such reserve accumulation, in particular for Asian countries that have promoted export-led growth underpinned by competitive exchange rates. Asian economies have been willing to absorb the cost of reserve accumulation rather than adjusting their exchange rate levels. This strategy, however, has increased the likelihood of protectionist measures from abroad, which could lead to contractions in trade and output. Moreover, these dynamics may transition to a generalized real appreciation of the major Asian currencies, while mounting pressure for a reduction of the U.S. fiscal deficit to sustainable levels.