Andreas Steiner

International Reserves and the Composition of Equity Capital Inflows

We study the effect of central banks’ international reserve hoardings on the composition of equity capital inflows, namely the ratio of portfolio equity investment (PEI) to foreign direct investment (FDI). Foreign investors’ decisions regarding the location and the type of equity capital investment might be influenced by a country’s level of international reserves. In a simple theoretical model, we show that higher reserves, thanks to their ability to lower exchange rate risk, reduce the risk premium of portfolio equity inflows. Hence, higher reserves are expected to increase the inflow of portfolio equity investment relative to FDI. We test this hypothesis for a sample of emerging markets during the period 1980-2007 using static and dynamic panel data methods. The results suggest that higher levels of reserves are associated with a larger ratio of PEI inflows relative to FDI. This result points to a collateral benefit of reserves that has been neglected so far: Reserves contribute to deeper domestic financial markets and facilitate domestic firms’ access to foreign financing.

Current Account Imbalances: The Role of Official Capital Flows

The chapter entitled “Current Account Imbalances: The Role of Official Capital Flows” establishes a link between the structure of the international monetary system, global imbalances and the US current account deficit. It shows that global imbalances are the natural outcome of a monetary system based on the dollar as key currency. Our panel data analysis over the period 1970–2009 confirms the hypothesis that the global demand for reserve assets by central banks lowers the current account balance of the reserve-issuing country: Any dollar of provided reserve assets decreases the US current account by more than one dollar. The flip side of this effect is a higher current account balance in reserve-accumulating countries. The empirical results are corroborated by an application of the portfolio balance model. These novel findings show that the worldwide demand for international reserves has contributed to the buildup of global imbalances.

Reserve Policies of East Asian Central Banks: Causes, Consequences and Prospects

This chapter surveys international reserve policies of East Asian central banks. It describes the massive accumulation of foreign exchange reserves since the financial crisis of 1997 and compares the behavior of East Asian countries to that of other emerging markets and the rest of the world. Based on a review of empirical panel data analyses, explanations for rising reserve levels are provided. In particular, mercantilist and precautionary motives, reactions to past financial crises and competitive considerations are discussed. The chapter then assesses the consequences of this reserve demand: Reserve hoarding entails costs and might interfere with domestic monetary policy. Finally, we examine how currency cooperation in East Asia might affect reserve policies. Potential forms of cooperation include bilateral swap agreements and reserve pooling. The Chiang Mai initiative, an illustrative example of reserve pooling, is presented and some ideas for potential improvements are pointed out.