International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez* and Omar Ruiz**
Date submitted: July29, 2011. Date accepted: January 27, 2012

The accumulation of international reserves on the part of emerging countries stands out as one of the most relevant aspects of monetary and financial imbalances today. Among such nations, Latin Americans are reaching new, historic levels. No theoretical or empirical intervention model exists that can explain or justify this enormous accumulation, which in the end, merely reveals new ways of transferring value from less developed to developed countries. Emerging countries undertake activities within the international monetary system, which has the dollar and other strong currencies as a base, seeking to accumulate large amounts of currencies as a precautionary measure to administer their exchange markets. In so doing they strengthen their expectation management policy with regard to meeting inflation targets.

Keywords:monetary policy, currencies, exchange rate, international reserves.

This article has two specific objectives. Firstly to show that the large volume of international reserves is a response to the monetary instability created by the US dollar's position as the world's unit of account. Related to this situation, central banks are deciding to establish a policy on inflation targets, thus forcing them to intervene on their exchange markets to minimize inflation pass-through. The second objective is to show some of the most familiar methods and models used to establish optimal levels of international reserves, and how these levels have been outstripped, since they fail to explain the excessively large volumes of international reserves. As an example, the results of the Wijnholds-Kapteyn model are given in relation to four Latin American countries.

The article is divided into six sections: the first explains how the US dollar, as the international reserve currency, causes instability in the international monetary system. The second explains why central banks have decided to raise their international reserves without moderation. The third demonstrates the disproportion in the levels of international reserve held by developed countries on the one hand, and by developing countries on the other. The fourth describes theoretical considerations on the level of optimal reserves. The fifth details the evolution of variables, composite indicators and models that have previously been used to determine optimal reserve levels. The sixth examines the numerical results of the Wijnholds-Kapteyn model, and how they conflict with the real reserve values of the four Latin American economies in question: Argentina, Brazil, Chile and Mexico. The final section offers some general conclusions.

* Researcher at the Economic Research Institute, National Autonomous University of Mexico (Universidad Nacional Autónoma de México, Instituto de Investigaciones EconómicasUNAM-IIE). Email: My thanks to student Araceli Morales Manzo from the Economics Faculty for her help researching statistical and bibliographical information.

** Author of the thesis Aspectos teóricos y empíricos de las dimensiones de reservas internacionales del Banco de México. 1994-2009, Economics Faculty-UNAM. Email: