Can governments sleep more soundly when holding international reserves? A banking and financial vulnerabilities perspective
Abstract
We use a sample of 40 developing and emerging countries over the period 1995-
2015 to assess the effectiveness of international reserve holding as a crisis mitigator. We test
the relevance of the reserve accumulation decreasing returns assumption by estimating the most
recent version of the PSTR model. We find that increasing stocks of international reserves
allows domestic authorities to mitigate the negative impacts of financial and banking
vulnerabilities on GDP growth rates leading to reject the decreasing returns assumption. This
evidence is robust to sensitivity checks.
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