International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz
  • The US dollar's instability, as a result of the United States’ extraordinary twin deficits, in conjunction with global excess liquidity and the differentiation between interest rates around the world, show that the international monetary system must be transformed, moving beyond the use of national currencies (the dollar) as a unit of exchange and global reserve currency, since any national currency will respond to its own economic cycle and over time they cease to be stable currencies. This has led to an accumulation of international reserves by semi-industrialized countries, at a high financial cost and in detriment of their real economic growth.

  • The historically costly volumes of reserves held by emerging countries is in response to a policy of managing expectancies to sustain predefined exchange rates, and thus attempt to control inflation pass-through, given that these countries are committed to developing monetary policies known as inflation targeting.

  • The Latin American countries in question adopted floating exchange rates and attempted to use them as a control against external shocks. But in fact, regardless of their lines of argument consistently in favor of their currencies being priced by the international market, financial and monetary authorities intervene indirectly on said market through their international reserves, for example with: “1) hidden operations such as lines of credit, loans on futures markets or foreign-currency-denominated debt used to defend the rate against speculative pressures and 2) direct interventions with reserves and interest rate movements” (Téllez, 2004: 100).

  • The countries in question, similarly to other emerging economies are accumulating monetary reserves at unprecedented levels; the drawback is that they are backing up their respective currencies instead of sustaining them through production. This constrains productive capacity and employment in their countries.

  • Although the optimality models provide first-hand information, they cannot be used across the board. Nor can the decisions on handling international reserves be based solely on quantitative analyses; qualitative criteria defined in terms of each country's economic objectives must be considered. Optimal demand models and early-warning indicators only provide partial information, and therefore must be used cautiously and in the understanding that they just offer guidance to those in charge of economic policy. As such they must not be the exclusive criteria to be considered when defining the guidelines of the monetary asset accumulation policy; nevertheless, emerging nations should ideally place a limit on the massive inflows of capital into their economies.