Cost of foreign reserve accumulation in emerging market and developing economies

ʿAbd-al-Hāliq, Ǧūda; Rizk, Amany
A icle
Cos o o eign ese e accumula ion in eme ging
ma ke and de eloping economies
Re iew o Economics and Poli ical Science (REPS)
P o ided in Coope a ion wi h:
Cai o Uni e si y, Cai o
Sugges ed Ci a ion: ʿAbd-al-Hāliq, Ǧūda; Rizk, Amany (2025) : Cos o o eign ese e accumula ion
in eme ging ma ke and de eloping economies, Re iew o Economics and Poli ical Science (REPS),
ISSN 2631-3561, Eme ald, Bingley, Vol. 10, Iss. 2, pp. 112-133,
h ps://doi.o g/10.1108/REPS-12-2022-0108
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Cos o o eign ese e
accumula ion in eme ging
ma ke and de eloping economies
Gouda Abdel Khalek and Amany Rizk
Facul y o Economics and Poli ical Science, Cai o Uni e si y, Giza, Egyp
Abs ac
Pu pose –This pape aims o ob ain a ecen es ima e o he cos o p ecau iona y o eign ese e
accumula ion ha eme ging ma ke and de eloping economies (EMDEs) had o endu e o p o ec hemsel es
agains he isks o inancial globaliza ion. In addi ion, he s udy es ima es he cos o excess ese es in
eme ging ma ke economies (EMEs) using a ious ese e adequacy indica o s ha e lec po en ial sou ces o
o eign exchange d ains and ulne abili y in EMEs’balance o paymen s.
Design/me hodology/app oach –This pape begins by explaining he accumula ion o o eign ese es in
EMDEs as a sel -p o ec ion s a egy agains he isks o inancial globaliza ion. Nex , i sheds ligh on he di e en
ypes o economic cos s o o eign ese e accumula ion. Finally, i es ima es he cos o o eign ese e accumula ion
in EMEs du ing he pe iod (1990–2018) and in EMDEs du ing he pe iod (1990–2015) due o da a a ailabili y.
Findings –Resul s indica e ha he cos o accumula ing o eign ese esasasel -p o ec ions a egyinEMDEs
and EMEs’was huge compa ed o hei de elopmen inancing needs. Applying a ious ese e adequacy
measu es demons a es ha many o he EMEs we e holding inadequa e p ecau iona y ese es in 2018. Ac ually,
his e lec s he signi ican inc ease in ex e nal sho e mdeb ha manyo heEMEsha ewi nessedsince he
e up ion o he global inancial c isis (2008). Thus inc easing ese es in EMEs wi h weak ese e bu e s and highe
ex e nal deb is c i ical as hey a e mo e ulne able o ex e nal shocks and capi al low e e sals. Also gi en he
es ima ed huge cos s o accumula ing o eign ese es, EMDEs should accompany i by o he complemen a y
sel -p o ec ion policies and liquidi y managemen policies o ee up esou ces o p oduc i e in es men .
O iginali y/ alue –The s udy con ibu es o he li e a u e by es ima ing he cos o p ecau iona y o eign
ese e accumula ion imposed on EMDEs du ing an ex ended pe iod o ime ha co e s a decade a e he
onse o he global inancial c isis. Also o he au ho s’knowledge, his is he i s s udy ha es ima es he cos
o excess ese es in EMEs using a ious ese e adequacy indica o s including he In e na ional Mone a y
Fund (IMF) assessing ese e adequacy (ARA) app oach.
Keywo ds Fo eign ese e accumula ion, Risks o inancial globaliza ion, Sel -p o ec ion s a egy,
Cos o p ecau iona y ese es, Eme ging ma ke economies
Pape ype Resea ch pape
1. In oduc ion
O e he pas wo decades, inancial globaliza ion has been accompanied by equen and
pain ul inancial c ises. Du ing such c ises, including he global inancial c isis, coun ies
wi h la ge o eign ese es we e mo e success ul in a e ing panic in inancial ma ke s,
p e en ing sudden e e sals in capi al lows and mi iga ing he nega i e e ec s o inancial
c ises (Fische , 2001;Blancha d e al., 2010;Rose and Spiegel, 2010;Llaudes e al., 2010;
Bussi
e e e al., 2015). Thus, o eign ese e accumula ion was a popula sel -p o ec ion
s a egy adop ed by many eme ging ma ke and de eloping economies (EMDEs). Mos
REPS
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112
JEL Classi ica ion —E58, F31, F32, F36, F41, F65, G01
© Gouda Abdel Khalek and Amany Rizk. Published in Re iew o Economics and Poli ical Science.
Published by Eme ald Publishing Limi ed. This a icle is published unde he C ea i e Commons
A ibu ion (CC BY 4.0) licence. Anyone may ep oduce, dis ibu e, ansla e and c ea e de i a i e wo ks
o his a icle ( o bo h comme cial and non-comme cial pu poses), subjec o ull a ibu ion o he
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h ps://www.eme ald.com/insigh /2631-3561.h m
Recei ed 15 Decembe 2022
Re ised 10 Janua y 2023
Accep ed 10 Janua y 2023
Re iew o Economics and Poli ical
Science
Vol. 10 No. 2, 2025
pp. 112-133
Eme ald Publishing Limi ed
e-ISSN: 2631-3561
p-ISSN: 2356-9980
DOI 10.1108/REPS-12-2022-0108
EMDEs, especially a e he Eas Asian c isis (1997), conside ed o eign ese es as a
p ecau iona y cushion agains he isks o inancial globaliza ion.
Howe e , he accumula ion o o eign ese es in EMDEs in ol es conside able cos s.
The e o e, i is impo an ha a decade a e he onse o he global inancial c isis o ha e an
es ima e o he cos o p ecau iona y o eign ese es which EMDEs had o endu e o sel -p o ec
hemsel es. Ha ing a ecen es ima e o his cos can help policymake s in EMDEs o decide i
hey should con inue accumula ing mo e ese es o whe he hey should begin o adop o he
complemen a y sel -p o ec ion policies o ee up esou ces o p oduc i e in es men .
The pu pose o his pape is wo old: (1) o p o ide insigh s in o he ela ion be ween he isks o
inancial globaliza ion and p ecau iona y ese e accumula ion in EMDEs and (2) o each a ecen
es ima e o he cos o p ecau iona y ese es which inancial globaliza ion isks’imposed on
EMDEs. We es ima e his cos by ollowing he me hodology applied by Rod ik (2000) and Rod ik
(2006) which uses he impo co e age ese e adequacy indica o . In addi ion, we es ima e he cos
o excess ese es in eme ging ma ke economies (EMEs) using a ious ese e adequacy
indica o s ha e lec po en ial sou ces o o eign exchange d ains and ulne abili y in EMEs’
balance o paymen s. We es ima e hese cos s du ing he pe iod (1990–2015) o EMDEs and du ing
he pe iod (1990–2018) o EMEs, hus co e ing almos a decade a e he global inancial c isis.
I should be no ed ha li e a u e de ines di e en mo i es o ese e accumula ion in EMDEs
which include mainly: 1 – he p ecau iona y mo i e (accumula ing ese es o sel -insu e agains
isks o inancial globaliza ion), 2 – he me can ilis mo i e (accumula ing ese es as a esul o
p omo ing expo compe i i eness h ough p e en ing o slowing cu ency app ecia ion), 3 -–
mo i es ela ed o mone a y and exchange a e policy (accumula ing ese es o main ain p ice
s abili y by lowe ing exchange a e ola ili y and accumula ion as a esul o applying a “Leaning
agains he wind (LAW)”policy. Acco ding o he LAW policy, ese es a e accumula ed o limi
app ecia ion and o be sold in case o capi al in low sudden s ops) (A slan and Can 
u, 2019).
Bu i is ac ually ha d o d aw a s ic di iding line be ween he p ecau iona y mo i e and
o he non-p ecau iona y mo i es. As e en he me can ilis mo i e can be a guably linked o he
p ecau iona y mo i e i i was assumed ha ha ing a posi i e s able cu en accoun con ibu es
o a e ing he e up ion o inancial and economic c ises (Rose o, 2015). In addi ion, al hough
some s udies a gued ha he me can ilis mo i e played an impo an ole in EMEs’ ese e
accumula ion accele a ion since he 2000s (Ghosh e al.,2012;Dela e and Fouquau, 2012;Du du
e al., 2009). The empi ical s udies which es ed he ela i e impo ance o he p ecau iona y and
me can ilis mo i es showed ha he me can ilis mo i e played a e y limi ed ole in he
accumula ion o o eign ese es in EMDEs. Acco ding o hese s udies’ esul s, o eign ese e
accumula ion in EMDEs was mainly explained by he p ecau iona y mo i e and was
signi ican ly co ela ed wi h he le el o inancial in eg a ion (Aizenman and Lee, 2007;Dela e
and Fouquau, 2012;Ghosh e al., 2012,2014). The e o e, he pape ocuses on he p ecau iona y
mo i e o accumula ing ese es, while o he non-p ecau iona y mo i es (such as he
me can ilis mo i e which is ela ed o he exchange a e policy) lie beyond he scope o he pape .
This pape is o ganized as ollows: Sec ion 2 analyzes he accumula ion o p ecau iona y
ese es in EMDEs as a sel -p o ec ion s a egy necessi a ed by he isks o inancial
globaliza ion and capi al accoun libe aliza ion in pa icula . In Sec ion 3, we examine he
di e en cos s o accumula ed o eign ese es. Sec ion 4 indica es he me hodology, da a and
esul s o calcula ing he cos o ese es in EMDEs and EMEs. Finally, he main indings o his
pape a e epo ed in Sec ion 5.
2. Rese e accumula ion as a sel -p o ec ion s a egy agains inancial
globaliza ion isks
By he end o he 1990s, mos o he coun ies o he wo ld ealized he downside isks o
inancial globaliza ion due o a numbe o easons. Fi s , inancial globaliza ion has been
Cos o
p ecau iona y
ese e
accumula ion
113
accompanied by equen and pain ul inancial c ises (in e ms o ou pu , social and e en
poli ical ins abili y cos s) [1]. Some o he mos pain ul inancial c ises include Mexico (1995),
Eas Asia (1997), Russia (1998), Tu key (1994) and (2001), B azil (1999), A gen ina (2002), and
he global inancial c isis (2008). Mo eo e , hese c ises occu ed wi h an absence o an
in e na ional lende o las eso (ILLR) and a lack o in e na ional egula o y s uc u es and
sa egua ds. The e o e, he ecu ence o inancial c ises in ecen yea s ques ioned he bene i s
o inancial globaliza ion and aised conce ns abou i s isks [2].
Second, inancial c ises, especially he ones which hi EMDEs [3], canno be a oided by jus
ha ing sound mac oeconomic undamen als. As hese c ises can occu due o dis o ions which
he in e na ional inancial ma ke s su e om o as a esul o wha is called “Con agion E ec ”
(Rod ik, 2006;Aizenman e al., 2007). In his con ex , we should also e e o Hyman Minsky’s
heo y o “Financial Ins abili y Hypo hesis”(Minsky, 1986,1992) which was la gely igno ed by
mains eam economis s bu he occu ence o he global inancial c isis in 2008 shed ligh on i .
Minsky’s heo y sugges s ha he inancial sys em and inancial capi alism a e inhe en ly
uns able. Acco ding o his hypo hesis, ins abili y and business cycles in a capi alis economy
do no depend upon exogenous shocks bu a e a esul o he in e nal dynamics o he capi alis
economies. He a gued ha ins abili y and agili y basically s em om he uns oppable p ocess
o inno a ion o new inancial p oduc s, p ac ices and ins i u ions. The huge amoun o
inancial inno a ions makes i di icul , i no impossible, o moni o o con ol he inancial
sys em. Thus inancial c ises a e an expec ed ou come o he o ces a wo k in he mode n
capi alis economy as inancial ins i u ions g ow in a way ha inc eases he deg ee o
ins abili y. Acco dingly, Minsky inally concluded ha ha ing a capi alis economy which
depends on a comple ely ee ma ke is economically and poli ically impossible as his economy
will be mo e p one o equen inancial c ises and economic ecessions (Minsky, 1986,1992).
Thi d, he mac oeconomic en i onmen o ee capi al lows may su e om wha is called
“Impossible T ini y o T ilemma”; as i is impossible o ha e ee mo emen o capi al, exchange
a e s abili y and mone a y au onomy (Mundell, 1963). In such an en i onmen , ee mo emen o
capi al, pa icula ly, sho - e m o eign po olio in es men , may inc ease he endency o igge
inancial c ises (Abdel-Khalek, 2004). I should also be no ed ha inancial s abili y was added o
he T ilemma policy goals as one o he unin ended consequences o inancial globaliza ion is he
g owing exposu e o EMDEs o sudden s ops, capi al ligh s and cos ly inancial c ises.
This u ned he T ilemma amewo k in o a policy Quad ilemma (Aizenman, 2011).
The e o e, gi en EMDEs’limi ed and condi ional access o capi al ma ke s and ins i u ional
swap lines a ailable o ad anced coun ies, hey accumula ed unp eceden ed s ocks o o eign
ese es o sel -p o ec [4] hemsel es. In ac , he Eas Asian inancial c isis was a u ning poin
in he pa e n o ese e accumula ion in EMDEs (especially he Asian coun ies), as hey
concluded in he a e ma h o he c isis ha : (1) hey canno ely on he In e na ional Mone a y
Fund (IMF) o e o ms in he “In e na ional Financial A chi ec u e” o p o ec hemsel es
agains he di e en isks o inancial globaliza ion. EMDEs ealized ha ge ing loans om he
IMF is no gua an eed, and e en i hey succeed in ge ing hem hey a e associa ed wi h s ic
condi ionali y which in some cases esul ed in high economic, social and poli ical cos s; (2) i is
no enough o ely on sound mac oeconomic policies since e en well-managed coun ies can be
hi by con agion om elsewhe e (Rod ik, 2006;Aizenman e al., 2007;Felds ein, 1999).
In addi ion, he IMF i sel emphasized he impo ance o ese es as a means o c isis
p e en ion and p oposed new measu es o e alua e hei adequacy. As a e he Asian
inancial c isis, i was ealized ha high mobili y o capi al is becoming inc easingly
impo an in e alua ing he adequacy o ese es (Fische , 2001).
Thus despi e he g ea e exchange a e lexibili y, which was hough o educe he need
o ese es, he s ock o ese es has inc eased in mos EMDEs. The accumula ion o
ese es has accele a ed d ama ically a e he inancial c ises which many Asian and La in
Ame ican coun ies ha e wi nessed in he la e 1990s and he beginning o he 2000s.
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As EMDEs accumula ed unp eceden ed s ock o o eign ese es (excluding gold), ha
eached US $ 4.8 n in 2008 as shown in Figu e 1. This s ock o ese es ep esen ed 24.5% o
EMDEs’g oss domes ic p oduc (GDP) in 2008. Also o mos EMEs, ese e co e age has
isen o high le els ela i e o adi ional no ms, eaching almos 10 mon hs o impo s and
475% o sho - e m ex e nal deb in 2008 (IMF, 2010).
Howe e , he g ow h o ese e accumula ion in EMDEs slowed signi ican ly in 2008–2009
due o he e up ion o he global inancial c isis (2008) as shown in Figu e 1. In ac , his c isis
i s hi he ad anced economies (AEs) by he end o 2007 hen i became global by mid-2008
and hus was ansmi ed o EMDEs h ough ade and inancial channels. The e o e, mos
expo -o ien ed coun ies and hose wi h high le els o deb we e nega i ely a ec ed by he
c isis and ha e acco dingly wi nessed sha p declines in hei GDP. In o de o ace he c isis,
EMDEs had o ei he allow hei cu encies o dep ecia e o /and o d aw down hei o eign
ese es which hey con inued o accumula e all h ough he i s hal o 2008 up ill he poin a
which hei GDP began o decline (Dominguez, 2012). Bu EMEs ha endu ed la ge ese e
losses du ing he second hal o 2008 succeeded o es o e mos o hei losses by he i s
qua e o 2009 “ ese es bounce back”. In addi ion, al hough some EMEs ha e wi nessed la ge
ese e deple ion, many o he EMEs who owned la ge s ocks o ese es choose no o deple e
hem and p e e ed o allow hei cu encies o dep ecia e. Acco ding o Aizenman and Sun
(2009), he decision o hese coun ies no o deple e ese es was cons ained by hei “ ea o
losing ese es a he han hei ea o loa ing”.
Then, he pace o ese eaccumula ion eco e ed a e being a ec ed by he global inancial
c isis (2008) in pa e lec ing he eco e y o GDP in addi ion o ade and inancial lows. Also,
many o he EMDEs, which used i s ese es du ing he c isis, accumula ed mo e ese es o
es o e hei p e-c isis ese e le els o e en o inc ease i (such as Sou h Ko ea, Mexico, India
and B azil). In ac , a e he c isis, mo e coun ies we e con inced ha accumula ing mo e
ese es inc eases hei lexibili y in ace o ad e se ex e nal shocks and e ec i ely mi iga es
he nega i e impac s o inancial c ises. EMEs wi h la ge p e-c isis ese e le els had s onge
and as e GDP g ow h eco e y and we e mo e esilien o he c isis han AEs (Dominguez,
2012;Didie e al.,2011). The e o e, EMDEs’ o al o eign ese es excluding gold inc eased o
3859
3049
4139.5
3682
7979
6731
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
US Dolla , Billions
Yea s
China Eme ging and De eloping Economies Excluding China Eme ging and De eloping Economies
No e(s): IMF, In e na ional Financial S a is ics (IFS)
Figu e 1.
To al ese es
(excluding gold) in
eme ging ma ke and
de eloping economies
(EMDEs) and China
(1990–Ap il 2017), US
dolla billions
Cos o
p ecau iona y
ese e
accumula ion
115

each US $7.98 n in 2013, bu i hen declined o US $6.73 n in Ap il 2017 mainly due o he
ecen decline in China’s o eign ese es [5] as shown in Figu e 1.
To sum up, EMDEs accumula ed o eign ese es a e he Eas Asian c isis (1997) o
hedge agains he inc easing inancial ins abili y which esul ed om hei g owing inancial
in eg a ion wi h he global inancial sys em as shown in Figu es 2 and 3 (Chinn and I o, 2006;
Lane and Milesi-Fe e i, 2006). Since o eign ese es a e conside ed as a p ecau iona y
cushion agains he isks o inancial openness (sudden s ops/ ligh s o capi al lows and
con agious inancial c ises) h ough i s e ec i e ole in bo h c isis p e en ion and c isis
managemen /mi iga ion (Aizenman and Lee, 2007;Obs eld e al., 2010). The e o e, o eign
ese e accumula ion has inc eased in ecen yea s al hough i has been s essed ha i is a
ela i ely cos ly sel -p o ec ion s a egy (Rod ik, 2006;S igli z, 2006;Cho, 2014).
3. Cos s o o eign ese e accumula ion
Like mos economic policy measu es, o eign ese e accumula ion has i s cos s which come
om many di e en sou ces ha a e di icul o quan i y. The e o e, calcula ing he p ecise
cos o excess ese es is a challenging exe cise ha aced many empi ical di icul ies. One o
hese di icul ies is he lack o consensus ega ding he op imum le el o ese es; as mos
ese e adequacy ules a e designed o ely on ules o humb a he han p ecise c i e ia.
We can mainly iden i y h ee ypes o economic cos s o o eign ese e accumula ion: (1)
The quasi- iscal cos o ese es, in he o m o he cos o s e iliza ion and o eign exchange-
ela ed losses bo ne by he cen al bank; (2) The oppo uni y cos o o gone consump ion o
in es men o he whole economy; and (3) The cos o holding ese es based on he (Guido i–
G eenspan) ule, which measu es he di e ence be ween he cos o sho - e m ex e nal
bo owing and he e u ns gene a ed by ese e asse s.
3.1 The quasi- iscal cos o ese es
As a cos showing up in he balance shee o he cen al bank, he quasi- iscal cos [6] o
ese es is incu ed when he mone a y au ho i ies engage in open ma ke ope a ions o
Eas Asian Financial C isis
Global Financial C isis
0
0.1
0.2
0.3
0.4
0.5
0.6
0
5
10
15
20
25
30
35
De-Ju e Financial Libe aliza ion
dloGgnidulcexE(se esaeRla oT
As A Pe cen o GDP
To al Rese es (Excluding Gold) As A Pe cen o GDP De-Ju e Financial Libe aliza ion
No e(s): De-Ju e Financial Libe aliza ion: Chinn and I o (2006)
To al Rese es (Excluding Gold) and GDP: IMF, In e na ional Financial S a is ics (IFS)
Figu e 2.
De elopmen o o al
ese es (excluding
gold) as a pe cen o
GDP and le el o de-
ju e inancial
libe aliza ion in
eme ging ma ke
economies (1990–2015)
REPS
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116
s e ilize he expansiona y impac o ese e accumula ion on he money supply (Cho, 2014). In
gene al, s e iliza ion ope a ions can be de ined as any se o policies designed o mi iga e he
impac o ese e accumula ion on domes ic in la ion and in e es a es. Au ho i ies
equen ly eso o s e iliza ion ope a ions o deal wi h he undesi able e ec s on domes ic
mone a y condi ions ha may esul om sus ained uns e ilized in e en ion. These
undesi able side e ec s mainly include ising in la iona y p essu es, con lic be ween
exchange a e and domes ic mone a y policy objec i es, asse -p ice bubbles and g owing
o eign exchange exposu e o he public sec o (La igne, 2008).
S e iliza ion p ocess in ol es, in pa icula , cen al bank pu chase o ela i ely low-yield
o eign asse s while issuing o selling ela i ely high-yield domes ic asse s (by selling
domes ic go e nmen secu i ies ou o hei po olio). This esul s in abso bing he addi ion
o he domes ic money supply injec ed in o he economy by he pu chases o o eign
exchange, lea ing he mone a y base unchanged and e ec i ely neu alizing i s impac on
domes ic in e es a es and in la ion (Higgins and Kli gaa d, 2004). In mos EMDEs, he
p ima y pu chase s o he go e nmen bonds sold in open ma ke ope a ions a e he
esiden s. The e o e, any cos bo ne by he cen al bank is equi alen o a ans e o income
om he public o he p i a e sec o (Rod ik, 2006).
S e iliza ion in e en ion esul s mainly in wo kinds o cos s; i s , he di ec iscal cos o he
mone a y au ho i ies, which ep esen s he di e ence be ween wha he cen al bank ea ns on
in e na ional ese es and wha i pays on he domes ic deb issued o s e ilize he ese es.
Second, he indi ec sys emic cos o p e en ing cu en accoun adjus men ; as p olonged and
one-sided s e ilized in e en ion can delay eal exchange a e adjus men . The di ec cos is he
one being he mos commonly conside ed as al hough exchange a e- ela ed losses can and
ha e been la ge, hey a e no ealized un il he unde lying ese e asse s a e sold. Albei , poo
da a on he ull ex en and composi ion o s e iliza ion makes i di icul o measu e he quasi-
iscal cos s o s e iliza ion, e idence indica es ha s e iliza ion a es ha e inc eased in Asia
du ing he ecen pe iod o pe sis en accumula ion o o eign exchange ese es (Mohan y and
Tu ne , 2005,2006;G een and To ge son, 2007;Bleaney and De adas, 2017).
Eas Asian Financial C isis
0
20
40
60
80
100
120
140
0
5
10
15
20
25
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
De-Fac o Financial Libe aliza ion
nec ePAs
A)d
loGgnidulcxE(se
es
eRla oT
o GDP
To al Rese es (Excluding Gold) As A Pe cen o GDP De-Fac o Financial Libe aliza ion
Sou ce(s): Au ho s’ calcula ions
No e(s): De-Fac o Financial Libe aliza ion: Lane and Milesi-Fe e i (2006)
To al Rese es (Excluding Gold) and GDP: IMF, In e na ional Financial S a is ics (IFS)
Figu e 3.
De elopmen o o al
ese es (excluding
gold) as a a io o GDP
and le el o de- ac o
inancial libe aliza ion
in eme ging ma ke
economies (1992–2004)
Cos o
p ecau iona y
ese e
accumula ion
117
Ac ually, es ima es indica e ha he cos o s e ilizing a ese e accumula ion o 10% o
GDP can ange om ze o o 1% o GDP, depending on he in e es sp ead and he expec ed
exchange a e dep ecia ion (Edison, 2003). Bu whe eas he quasi- iscal cos has been la ge in
some EMDEs, o he ex en ha i gene a ed conce ns and deba es abou he excessi e
ese e accumula ion, i is no he mos ele an measu e o cos om a Mac o na ional
pe spec i e (Rod ik, 2006;Wijnholds and Sønde gaa d, 2007).
3.2 The oppo uni y cos o o gone consump ion o in es men
F om a mac o pe spec i e, he mos ele an cos is he oppo uni y cos o holding ese es,
he b oades o which is o gone consump ion o in es men [7] bo ne by he whole economy.
The oppo uni y cos o holding ese es s ems om he ac ha he mone a y au ho i ies
could in es in highe e u n asse s ins ead o sa e and liquid in es men s and his is wha a
numbe o cen al banks ha e s a ed o do. E alua ion o he oppo uni y cos would in ol e
compa ing he e u ns on ese es wi h he e u ns om in es ing na ional sa ings in o
domes ic p ojec s, public o p i a e (Wyplosz, 2007).
In ac , he inancial esou ces used o pu chase ese e asse s a e a po en ial sou ce o
inc easing economic g ow h in EMDEs. Inaddi ion o in es ing in highe e u ns p ojec s, hese
esou ces can be ei he spen on consump ion o u gen needs aced by hese coun ies o
in es ed in in as uc u e p ojec s and domes ic de elopmen p ojec s (C uz and Wal e s, 2008;
G een and To ge son, 2007). I is also a gued ha he use o hese esou ces in in es men s and
s imula ing economic ac i i y will inc ease agg ega e demand and his will e en ually inc ease
wo ld economic ac i i y and ade. This ac ually indica es ha accumula ing la ge amoun s o
o eign ese es has a subs an ial oppo uni y cos (Dominguez, 2009). In addi ion, mos high-
ese e coun ies ha e lowe capi al- o-labo a ios han he indus ial coun ies in whose bond
ese es a e held. Thus, he e u ns om a public in es men may be signi ican ly highe han
he cu en ea nings on ese es as long as hey a e alloca ed e icien ly.
I should be no ed ha a ious me hods o app oxima ing hese o gone e u ns ha e been
applied. Some me hods used ma ke in e es a es while o he s de i ed he e u n om an
assumed na ional p oduc ion unc ion (G een and To ge son, 2007). Howe e , calcula ing he
oppo uni y cos o holding ese es is di icul o implemen empi ically wi h any deg ee o
p ecision (Haune , 2006).
3.3 The cos o holding ese es based on he (Guido i–G eenspan) ule
This me hod is conside ed a na owe way o es ima e he inancial cos o ese es and i is
based on he (Guido i–G eenspan) ule o humb. Acco ding o he (Guido i–G eenspan) ule
[8], coun ies would ma ch e e y dolla o sho - e m ex e nal liabili ies wi h a dolla in
ese es. The na owes oppo uni y cos o each dolla a coun y accumula es o abide by
he (Guido i-G eenspan) ule is equal o he sp ead be ween he p i a ely incu ed cos s o
sho - e m bo owing on he one hand, and he yields on publicly held ese e asse s on he
o he . This me hod p o ides a concep ually clea e and mo e logically g ounded measu e
han he quasi- iscal cos o ese es. I is also less slippe y han he b oad oppo uni y cos o
ese es measu ed as o gone consump ion o in es men and i can be calcula ed wi h ewe
empi ical di icul ies. So, calcula ing he inancial cos o holding ese es using he
(Guido i–G eenspan) ule o e s he bes p oxy o hei cos .
Bu mos sho - e m p i a e o eign bo owing akes he o m o comme cial bank lending
a a es which a e no publicly a ailable and he e is no eliable sys ema ic way o ob ain i s
cos . While so e eign sp eads can be de i ed om benchma k indices o so e eign bonds
issued by majo eme ging ma ke s such as he Eme ging Ma ke s Bond Index (EMBI) [9].
The e o e, mos exis ing s udies ely on so e eign sp eads as a p oxy o he p i a e sec o ’s
cos o ex e nal bo owing (Rod ik, 2006).
REPS
10,2
118
Ne e heless, i is some imes a gued ha es ima ing he cos o ese es based on so e eign
sp eads such as he EMBI signi ican ly unde es ima es he ue cos and ha he es ima ed cos
should be conside ed as he minimum cos o holding ese es in EMDEs. This can be
explained by a numbe o easons: Fi s , he cos o go e nmen bonds is much lowe han ha
o he p i a e banks and i ms’liabili ies as i s isk p emium is much lowe . Second, heEMBI
co e s only a limi ed numbe o EMEs. All he coun ies included in he index a e conside ed
mo e c edi wo hy and, he e o e, ace signi ican ly lowe cos s o bo owing compa ed o he
cos acing he emaining EMDEs excluded om he index. Thi d, sho - e m ex e nal liabili ies
a e no he only sou ce o capi al d ain as o eign po olio in es men s should be aken in o
conside a ion in he (Guido i–G eenspan) ule when de e mining he adequa e ese e le el
due o i s high ola ili y and p opensi y o ligh . The e o e, e u ns on o eign po olio
in es men s which a e ypically much highe han e u ns on go e nmen bonds should be
used when calcula ing he cos o ese es (Cho, 2014).
This me hod was applied by a limi ed numbe o s udies (Rod ik, 2000,2006;Bi d and
Rajan, 2003;S igli z, 2006;Gallaghe and Sh es ha, 2012;Mezui e al., 2013;Cho, 2014). These
s udies concluded ha he accumula ion o ese es is a ela i ely cos ly sel -p o ec ion
s a egy.
4. Calcula ing he cos o p ecau iona y ese e accumula ion
4.1 Me hodology
To es ima e he cos o p ecau iona y ese es accumula ed in EMDEs based on he (Guido i–
G eenspan) ule o humb, we ollow he app oach applied by Rod ik (2000) and Rod ik (2006).
This app oach allows us o ge an es ima e o he cos which was imposed on EMDE by
inancial globaliza ion and i s isks. Acco ding o his app oach, an adequa e ese e le el is
de e mined using he h ee-mon hs o impo s ule o humb [10]. As p io o he g owing
inancial globaliza ion and he ecen escala ion o inancial c ises, o eign exchange ese es
we e mainly used o managing he cu en accoun which was he only sou ce o ulne abili y
in he balance-o -paymen s. Consequen ly, coun ies had o ha e enough o eign ese es o
mee unexpec ed ex e nal dis u bances which can cause a sudden s op in essen ial impo s
(Fische , 2001;Wyplosz, 2007;Aizenman and Pin o, 2013). Using he impo s ule allows us o
dis inguish he cos o cu en accoun - ela ed ese e accumula ion om he cos o
p ecau iona y capi al accoun - ela ed ese e accumula ion. In o he wo ds, he cos o ese es
in excess o h ee mon hs o impo s is he cos o addi ional ese e accumula ion equi ed by
capi al accoun libe aliza ion and he isks o inancial globaliza ion, which has been bo ne
almos exclusi ely by EMDEs. In addi ion, based on his app oach, he EMBI is used as a p oxy
o es ima ing he p i a e sec o ’s cos o ex e nal bo owing.
Based on he abo e-men ioned me hodology, we calcula ed he cos o p ecau iona y
ese es accumula ed in EMEs du ing he pe iod (1990–2018) and EMDEs du ing he pe iod
(1990–2015) due o da a a ailabili y. The cos is es ima ed as ollows: Fi s , all ese es
beyond h ee mon hs’wo h o impo s a e conside ed o be “Excess Rese es.”Second, he
a e age EMBI sp eads wi nessed lo s o ups and downs du ing he pe iod o s udy (1990–
2018) as shown in Table 1. The e o e, he pape sides wi h cau ion and uses h ee sp eads
(3%, 5% and 7%) o calcula e he cos o p ecau iona y ese es.
In addi ion o he abo e-men ioned me hodology, we ecalcula ed he cos o excess
ese es in EMEs only du ing he pe iod (1990–2018) by applying h ee di e en ese e
adequacy indica o s o he han he adi ional impo co e because (1) EMEs had he la ges
con ibu ion in o eign ese e g ow h since he e up ion o he Eas Asian c isis, (2) he
capi al accoun is he main sou ce o balance o paymen s shocks in EMEs and (3) using hese
di e en ese e adequacy ules can indica e whe he EMEs had adequa e p ecau iona y
ese es and hence can guide EMEs policymake s’decisions on u u e ese e le els.
Cos o
p ecau iona y
ese e
accumula ion
119
EMDEs would ha e o con inue sel -p o ec ing hei economies agains he isks o inancial
globaliza ion by accumula ing mo e o eign ese es. Fu he mo e, EMEs cha ac e ized by
high ex e nal deb le els and ela i ely low ese e co e age le els a e mo e ulne able o
ex e nal shocks and nega i e economic and poli ical de elopmen s. The e o e, dec easing
o eign ex e nal deb and ha ing adequa e o eign ese es in many EMEs become e en mo e
c i ical o inc ease hei esilience o ex e nal shocks and po en ial o eign liquidi y d ains.
Simul aneously, EMDEs should accompany he ese e accumula ion s a egy wi h o he
less cos ly ways o sel -p o ec ion and managing liquidi y such as (1) using e ec i e
p uden ial capi al con ols o manage sho - e m o eign liabili ies. Imposing hese con ols
should be selec i e and in e ac i e in a way ha dis inguishes sho - e m specula i e lows
om o eign di ec in es men lows. As many s udies ha e shown ha imposing capi al
con ol in addi ion o ha ing adequa e p ecau iona y ese es can be less cos ly and allows
coun ies o use hese esou ces o mo e p oduc i e uses and hus inc easing g ow h.
Mo eo e , he IMF a e he global inancial c isis (2008) adop ed a new policy ha
encou ages he sui able use o capi al con ols o p e en and mi iga e inancial ins abili y
and ulne abili y (Gallaghe and Tian, 2017;Gallaghe and Ocampo, 2013;Eicheng een and
Gup a, 2016;IMF, 2012). In addi ion, many s udies ha e ound ha EMEs which we e
imposing capi al con ols be o e he global inancial c isis (2008) ha e su e ed less om
g ow h de e io a ion (Os y e al., 2011;Ocampo, 2009). (2) Managing he accumula ed o eign
ese es h ough he es ablishmen o commodi y s abiliza ion unds, so e eign weal h
unds (SWFs) and/o na ional de elopmen banks. In ac , many newly indus ialized
Coun y
Annual cos o excess ese es (pe cen o GDP) assuming a 5% sp ead
Th ee mon hs o
impo s (M)
(M) þ
(STD)
(M) þ(STD) þ5% o
b oad money (M2)
IMF assessing ese e
adequacy (ARA) app oach
Eme ging Ma ke
Economies
0.82 0.35 0.04 0.06
China, P.R.:
Mainland
0.90 0.45 0.03 0.17
B azil 0.82 0.64 0.43 0.39
Russia 0.89 0.75 0.61 0.67
Ko ea, Republic o 0.73 0.41 0.12 –
India 0.39 0.20 0.003 0.19
Thailand 1.27 0.67 0.37 1.01
Indonesia 0.30 0.07 0.03 0.06
Pe u 1.04 0.81 0.71 0.77
Mexico 0.19 0.06 0.16 0.09
Malaysia 0.62 1.04 1.35 0.15
A gen ina 0.41 0.24 0.26 0.05
Poland 0.30 0.13 0.30 0.11
Egyp 0.39 0.18 0.01 0.21
Sou h A ica 0.26 0.24 0.40 0.34
Chile 0.31 0.03 0.19 0.08
Bulga ia 1.28 0.54 0.33 0.78
Tu key 0.07 0.68 0.80 0.33
Romania 0.22 0.11 0.21 0.18
Venezuela 0.04 1.25 1.25 –
Hunga y 0.05 0.74 0.88 0.01
Da a: IMF, In e na ional Financial S a is ics (IFS) Wo ld Bank, Wo ld De elopmen Indica o s and Assessing
Rese e Adequacy (ARA) app oach da a is a ailable online a : h ps://www.im .o g/ex e nal/da amappe /
ARA/index.h ml
Sou ce(s): Au ho s’calcula ions
Table 4.
The annual cos o
holding ese es
(pe cen o GDP) in
some eme ging ma ke
economies in 2018
REPS
10,2
126

coun ies (such as Ko ea and Singapo e), oil expo ing coun ies (such as he Uni ed A ab
Emi a es and Kuwai ) and coun ies cha ac e ized by la ge s ocks o o eign ese es and
high g ow h a es ied o maximize he e u n o hei accumula ed ese es h ough
in es ing excess p ecau iona y ese es in in es men unds (mainly SWFs) (C uz and
K iesle , 2010). (3) C ea ion o egional ag eemen s o coope a ion h ough he es ablishmen
o ese e pooling (such as he La in Ame ican Rese e Fund [FLAR]) and o eign exchange
swap ag eemen s (such as he Chiang Mai Ini ia i e in Sou h Eas Asia). These egional
ag eemen s can play a complemen a y ole ha suppo s he in e na ional inancial
ins i u ions’e o s. As hese ag eemen s can p e en and espond o egional inancial c ises
in a way ha dec eases egional con agion isk and hence dec eases he p ecau iona y
ese e accumula ion and i s associa ed cos s (Rose o, 2015).
So in o de o sel -p o ec hemsel es and also accele a e hei economic g ow h p ocess,
EMDEs should accompany he ese e accumula ion s a egy wi h a mix o hese
complemen a y policies. In ac , choosing he igh mix o hese policies depends on he
special cha ac e is ics o each economy and he p e ailing in e na ional condi ions. A be e
unde s anding o he e ec i eness and design o hese complemen a y policies is le o
u u e in es iga ion and esea ch.
No es
1. The inancial c ises ha s uck Mexico in 1994 and he Eas Asian coun ies in 1997 led o a all in
he g ow h a e o GDP by 10 pe cen age poin s. The inancial c ises ha hi Russia in 1998 and
Ecuado in 1999 also led o a simila decline in he le el o eal ou pu . In ac , hese c ises no esul
only in a sha p inc ease in po e y le els, bu in poli ical ins abili y in addi ion (Mishkin, 2001).
2. In heo y, he e a e a numbe o di ec channels (augmen a ion o domes ic sa ings–lowe cos o
capi al due o be e isk alloca ion- ans e o echnology-de elopmen o inancial sec o ) and
indi ec channels (p omo ion o specializa ion–inducemen o be e policies–enhancemen o
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
Millions, US Dolla s
To al Rese es Execluding Gold Ex e nal Sho Te m Deb
Value o Th ee Mon hs o Impo s o Goods and Se ices To al Rese es Minus Gold (Excluding China)
Ex e nal Sho Te m Deb (Excluding China)
No e(s): IMF, In e na ional Financial S a is ics (IFS) and Wo ld Bank, Wo ld De elopmen
Indica o s
Figu e 7.
De elopmen o o al
ese es, ex e nal sho
e m deb and impo s
o goods and se ices
in eme ging ma ke
economies (1990–2018)
Cos o
p ecau iona y
ese e
accumula ion
127
capi al in lows by signaling be e policies) h ough which emb acing inancial globaliza ion can
help enhance g ow h in de eloping coun ies. Howe e , mos empi ical s udies could no p o e he
exis ence o a s ong and s a is ically obus causal ela ionship be ween inancial globaliza ion and
economic g ow h (P asad e al., 2004).
3. The coun y classi ica ion in he Wo ld Economic Ou look di ides he wo ld in o wo majo
g oups: AEs and EMDEs. The g oup o EMDEs includes all coun ies ha a e no classi ied as
AEs. EMEs a e conside ed o be coun ies in a ansi ional phase be ween de eloping and
de eloped s a us. They a e also a g oup o coun ies ha had a high economic pe o mance o he
pas se e al decades gi en hei di e si ied expo s and inancial openness. Howe e , EMEs’ as -
g owing economic pe o mance had been in e up ed by a numbe o inancial c ises. In he
a e ma h o he 1990s c ises, he con igu a ion o EMEs has been g owing in managed exchange
a e lexibili y, g ea e mone a y independence and deepe inancial in eg a ion (Aizenman and
Lee, 2007).
4. Sel -p o ec ion can be accomplished by inc easing liquidi y h ough one o he ollowing h ee
s a egies: dec easing STD, c ea ing a colla e alized c edi acili y and accumula ing o eign exchange
ese es (Felds ein, 1999).
5. Ac ually, one o he s uc u al changes wi nessed by he global economy in he ea ly 2000s can be
la gely a ibu ed o he massi e inc ease in o eign ese e accumula ion in China; making China
he wo ld’s la ges holde o o eign exchange ese es. China’s o al o eign ese es (excluding
gold), has inc eased om US $29.6bn in 1990 o i s highes le el in 2014 eaching US $3.9 n and
hen declining o US $3.049 n in Ap il 2017. The dec ease in Chinese o eign ese es can be
explained by he decline in Chinese expo s and impo s a e peaking in 2008. Also by 2012,
analys s we e educing hei es ima es o Chinese g ow h. The decline in o ecas ed eal g ow h
na u ally educed o ecas s o in e es a es and demand o he enminbi (CNY). This decline in
ese es, he e o e, means ha , since 2014, he cen al bank o China has been selling dolla s and
buying enminbi (CNY) o main ain he domes ic cu ency’s alue. These o eign exchange sales
ha e educed China’s o eign exchange ese es subs an ially (Neely, 2017).
6. The e m “Quasi” e lec s he ac ha , o en, hese cos s may be bo ne by he cen al bank as well as
by he easu y (La igne, 2008).
7. The esou ces used o pu chase ese es could also be used by he go e nmen o pay down i s
so e eign sho - e m ex e nal deb , since he in e es cos o a gi en amoun o sho - e m ex e nal
deb – hough di icul o measu e –likely exceeds he ea nings on an equi alen amoun o ese es.
The e o e, educing so e eign sho - e m ex e nal deb has an equal ulne abili y educ ion e ec ,
bu wi h a lowe ne cos (G een and To ge son, 2007).
8. The (Guido i-G eenspan) ule sugges s he main enance o ese es equi alen o 12 mon hs o a
coun y’s o al o eign obliga ion, which includes bu is no limi ed o impo s. The ule s a es ha
holding ese es enough o mee inancial obliga ions due wi hin one yea ’s ime wi hou ha ing o
depend on ex e nal sou ces should be su icien o wi hs and signi ican ex e nal shocks
(G eenspan, 1999;Wijnholds and Kap eyn, 2001).
9. The EMBI sp ead measu es he di e ence be ween he o al e u n o in e na ional go e nmen
bonds issued by EMEs and he o al e u n o bonds issued by he USA wi h he same cu ency
and ma u i y. So i measu es he in e es a e sp ead ha EMEs pay o bo ow om he
in e na ional inancial ma ke s o e he in e es a e i ge s as a e u n on i s ese es’asse s (US
easu y bonds and secu i ies). This index does no only measu e he bo owing cos ha EMEs
endu e bu also e lec s he deg ee o hei inancial agili y and ulne abili y (Kennedy and
Pale m, 2014).
10. The a io o in e na ional ese es o impo s (R/M) indica es he numbe o mon hs o impo s
ha could be inanced om he ese es. An adequa e le el o ese es was con en ionally
es ablished as a le el o ese es which co e s a leas h ee o ou mon hs o impo s. I is
impo an o no ice ha his c i e ion lacked any heo e ical unde pinning; i was a ule o humb,
based on a con en ional, disc e iona y iew o wha was conside ed adequa e (Bi d and Rajan,
2003;C uz and K iesle , 2010).
REPS
10,2
128
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Da a Appendix
Eme ging and De eloping Coun y Lis (120 Coun ies)
Eme ging and De eloping Asia (22 Coun ies)
Bangladesh, Bhu an, Cambodia, China, P.R.: Mainland, Fiji, India, Indonesia, Lao People’s Democ a ic
Republic, Malaysia, Maldi es, Mongolia, Myanma , Nepal, Papua New Guinea, Philippines, Samoa,
Solomon Islands, S i Lanka, Thailand, Tonga, Vanua u and Vie nam.
Eme ging and De eloping Eu ope (18 Coun ies)
Albania, Bulga ia, C oa ia, Hunga y, Macedonia, Poland, Romania, Republic o Se bia, Tu key,
A menia, Aze baijan, Bela us, Geo gia, Kazakhs an, Ky gyz Republic, Moldo a, Russia and Uk aine.
Middle Eas , No h A ica, A ghanis an, and Pakis an (19 Coun ies)
Islamic Republic o A ghanis an, Alge ia, Kingdom o Bah ain, Djibou i, Egyp , I aq, Jo dan, Kuwai ,
Lebanon, Libya, Mo occo, Oman, Pakis an, Qa a , Saudi A abia, Sudan, Sy ian A ab Republic, Tunisia
and he Republic o Yemen.
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Sub-Saha an A ica (6 Coun ies)
Came oon, Cen al A ican Republic, Chad, Republic o Congo, Equa o ial Guinea and Gabon.
Wes A ican Economic and Mone a y Union (WAEMU) (27 Coun ies)
Bo swana, Bu undi, Cape Ve de, Como os, Democ a ic Republic o Congo, E hiopia, The Gambia,
Ghana, Guinea, Kenya, Leso ho, Madagasca , Malawi, Mau i ius, Mozambique, Namibia, Nige ia,
Rwanda, Sao Tome and P incipe, Seychelles, Sie a Leone, Sou h A ica, Swaziland, Tanzania, Uganda,
Zambia and Zimbabwe.
La in Ame ica and Ca ibbean (28 Coun ies)
Dominica, G enada, A gen ina, A uba, The Bahamas, Ba bados, Belize, Boli ia, B azil, Chile, Colombia,
Cos a Rica, Dominican Republic, Ecuado , Gua emala, Guyana, Hai i, Hondu as, Jamaica, Mexico,
Nica agua, Panama, Pa aguay, Pe u, Su iname, T inidad and Tobago, U uguay and Venezuela.
Eme ging Ma ke s Coun y Lis (26 Coun ies)
A gen ina, Bangladesh, B azil, Bulga ia, Chile, China, Colombia, Czech Republic, Egyp , Hunga y, India,
Indonesia, Malaysia, Mexico, Pakis an, Pe u, Philippines, Poland, Romania, Russia, Sou h A ica, Sou h
Ko ea, Thailand, Tu key, Uk aine and Venezuela.
Co esponding au ho
Amany Rizk can be con ac ed a : [email p o ec ed]
Fo ins uc ions on how o o de ep in s o his a icle, please isi ou websi e:
www.eme aldg ouppublishing.com/licensing/ ep in s.h m
O con ac us o u he de ails: [email p o ec ed]
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